UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

OR

For the fiscal year ended December 31, 20152017

OR

For the transition period from                    to                    

OR

Commission file number 1-14700

台灣積體電路製造股份有限公司

(Exact Name of Registrant as Specified in Its Charter)

No. 8, Li-Hsin Road 6

Hsinchu Science Park

Hsinchu, Taiwan

Republic of China

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2015,2017, 25,930,380,458 Common Shares, par value NT$10 each were outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x☒    No  ¨☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934.    Yes  ¨☐    No  x☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x☒    No  ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨☒    No  ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer or an emerging growth company. See definition of “accelerated filer and“ large accelerated filer”filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x☒             Accelerated Filer  ¨☐             Non-Accelerated Filer  ¨☐            Emerging Growth Company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17    ¨☐  Item 18  ¨☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨☐    No  x☒

TABLE OF CONTENTS

Taiwan Semiconductor Manufacturing Company Limited

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“TSMC”, “tsmc”, “Open Innovation Platform”, “CyberShuttle” and Open Innovation Platform (“OIP”)“CoWoS” are some of our registered trademarks used by us in various jurisdictions, including the United States of America. All rights reserved.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This annual report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of U.S. securities laws. The terms “anticipates,” “expects,” “may,” “will,” “could,” “should” and other similar expressions identify forward-looking statements. These statements appear in a number of places throughout this annual report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this annual report. Important factors that could cause those differences include, but are not limited to:

Forward-looking statements include, but are not limited to, statements regarding our strategy and future plans, future business condition and financial results, our capital expenditure plans, our capacity management plans, expectations as to the commercial production using 10/7-nanometer and more advanced technologies, technological upgrades, investment in research and development, future market demand, future regulatory or other developments in our industry, business expansion plans or new investments as well as business acquisitions and financing plans. Please see “Item 3. Key Information —– Risk Factors” for a further discussion of certain factors that may cause actual results to differ materially from those indicated by our forward-looking statements.

PART I

Not applicable.

Not applicable.

Selected Financial and Operating Data

The selected consolidated statements of profit or loss and other comprehensive income data and other consolidated financial data for the years ended December 31, 2013, 20142015, 2016 and 2015,2017, and the selected consolidated statements of financial position data as of December 31, 20142016 and 2015,2017, set forth below, are derived from our audited consolidated financial statements included herein, and should be read in conjunction with, and are qualified in their entirety by reference to, these consolidated financial statements, including the notes thereto, which have been prepared in accordance with International Financial Reporting Standards or “IFRSs”(IFRS), asInternational Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) issued by the International Accounting Standards Board or “IASB”(IASB) (collectively, “IFRSs”). The selected consolidated statements of profit or loss and other comprehensive income data and other consolidated financial data for the year ended December 31, 20122013 and 2014 and the selected consolidated statements of financial position data as of December 31, 20122013, 2014 and 2013,2015 set forth below are derived from our audited consolidated financial statements not included herein. Since 2013, our audited consolidated financial statements were prepared in accordance with IFRSs, pursuant to the transitional relief granted by the U.S. Securities and Exchange Commission in respect of the first-time adoption of IFRSs, we have only provided financial statements and financial information for the financial years ended December 31, 2012, 2013, 2014 and 2015. Additionally, financial data as of and for the year ended December 31, 2011 derived from our consolidated financial statements prepared in accordance with accounting principles generally accepted (“GAAP” or “R.O.C. GAAP”) in the Republic of China (“R.O.C.” or “Taiwan”) have not been included below.

In addition to preparing financial statements in accordance with IFRSs as issued by the IASB included in this annual report, we also prepare financial statements in accordance with the IFRSs as adopted for use in Taiwan (“Taiwan-IFRSs”), which we are required to file with the Financial Supervisory Commission (“FSC”) of the Republic of China (“R.O.C.” or “Taiwan”) and Taiwan Stock Exchange (“TWSE”) under the applicable regulations and listing rules of the TWSE. Please see “Item 5. Operating and Financial Reviews and Prospects – First Time Adoption of IFRSs” for more details.The English translationstranslation of such financial statements areis furnished to the SECSecurities and Exchange Commission (“SEC”) on Form6-K, which areis not incorporated by reference to this or any of our previous annual reports on Form20-F.

Exchange Rates

We publish our financial statements in New Taiwan dollars, the lawful currency of the R.O.C. In this annual report, “$”, “US$” and “U.S. dollars” mean United States dollars, the lawful currency of the United States, and “NT$” and “NT dollars” mean New Taiwan dollars. This annual report contains translations of certain NT dollar amounts into U.S. dollars at specified rates solely for the convenience of the reader. The translations from NT dollars to U.S. dollars and from U.S. dollars to NT dollars were made by the exchange rate as set forth in the statistical release of the Federal Reserve Board. Unless otherwise noted, all translations for the year 20152017 were made at the exchange rate as of December 31, 2015,2017, which was NT$32.7929.64 to US$1.00. On April 1, 2016,13, 2018, the exchange rate was NT$32.2629.32 to US$1.00.

The following table sets forth, for the periods indicated, information concerning the number of NT dollars for which one U.S. dollar could be exchanged.

No representation is made that the NT dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all.

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

We wish to caution readers that the following important factors, and those important factors described in other reports submitted to, or filed with, the Securities and Exchange Commission, among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf, and that such factors may adversely affect our business and financial status and therefore the value of your investment:

Risks Relating to Our Business

Any global systemic political, economic and financial crisis (as well as the indirect effects flowing therefrom) could negatively affect our business, results of operations, and financial condition.

In recent times, several major systemic economic and financial crises negatively affected global business, banking and financial sectors, including the semiconductor industry and markets. These types of crises, including the prolonged decrease in economic growth or insolvency of major countries, could cause turmoil in global markets that often result in declines in electronic products sales from which we generate our income through our products and services. For example, there could beknock-on effects from these types of crises on our business, including significant decreases in orders from our customers; insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products; customer insolvencies; and counterparty failures negatively impacting our treasury operations. Any future systemic political, economic or financial crisis could cause revenuesrevenue for the semiconductor industry as a whole to decline dramatically, and if the economic conditions or financial conditionconditions of our customers were to deteriorate, additional accounting related allowances may be required in the future and such additional allowances could reduce our operating income and net income. Further, in times of market instability, sufficient external financing may not be available to us on a timely basis, on commercially reasonable terms to us, or at all. If sufficient external financing is not available when we need such financing to meet our capital requirements, we may be forced to curtail our expansion, modify plans or delay the deployment of new or expanded services until we obtain such financing. Thus, any future global economic crisis could materially and adversely affect our results of operations.

Since we are dependent onOur global manufacturing, design and sales activities subject us to risks associated with political, economic or other conditions or developments in various jurisdictions, including in particular the highly cyclical semiconductorR.O.C., as well as in international trade, which could negatively affect our business and electronics industries, which have experienced significantfinancial status and sometimes prolonged periodstherefore the market value of downturns and overcapacity, our revenues, earnings and margins may fluctuate significantly.your investment.

The electronics industriesmajority of our principal executive officers and semiconductor marketour principal production facilities are cyclicallocated in the R.O.C., and subjectthe majority of our net revenue is derived from our operations in the R.O.C. In addition, we have operations worldwide and a significant percentage of our revenue comes from sales to significantlocations outside the R.O.C. Operating in the R.O.C. and often rapid increasesoverseas exposes us to changes in laws, rules, regulations and decreasesthe enforcements of such laws, rules and regulations in product demand. Our semiconductor foundrycertain key areas that would have a material impact on our operations, such as intellectual property, antitrust, export control, import restrictions, and trade barriers or disputes, as well as the general political, economic and social conditions, outbreak of war or hostilities, terrorism, security risks, social unrests, protests, strikes, health conditions and possible disruptions in transportation networks, in the various jurisdictions in which we operate, which could result in an adverse effect on our business is affected by market conditionsoperations in such highly cyclical electronicsjurisdictions and our results of operations as well as the market price and the liquidity of our ADSs and common shares. Any major change in economic, fiscal and/or trade policies in the U.S. from which we derive a substantial portion of our revenue or in another major jurisdiction could severely affect our business, financial condition and results of operations. For example, recent trade tensions between major economies could result in trade barriers, including higher tariffs on certain products that, in turn, may have adverse effects directly and indirectly on our sales. In addition, any U.S. law or government incentive policy that encourages our U.S. customers to relocate their manufacturing capacity or supply chain to the U.S. or require their respective contractors, subcontractors and relevant agents to do so could impair our ability to sustain our current level of productivity and manufacturing efficiency. Our business model is intertwined with an ecosystem of semiconductor industries. Variationssuppliers in order levelsthe R.O.C. that permits thousands of our engineers and other relevant personnel to commute from one manufacturing site to another for purposes of refining specific designs and manufacturing processes in a timely manner. These advantages permit us to operate our manufacturing fabs efficiently and resolve any technical or commercial difficulties quickly to maintain our competitive edge. If these advantages are impaired or lost, we may be unable to sustain our current ability to supply our customers may resultwith goods and services at the current level of cost, quality, quantity and delivery schedule to which our customers have been accustomed.

As another example, the financial markets have viewed certain past developments in volatility inrelations between the R.O.C. and P.R.C. as occasions to depress general market prices of the securities of Taiwanese companies, including our revenuesown. In addition, the R.O.C. government has not lifted some trade and earnings. From time to time, the electronics and semiconductor industries have experienced significant and sometimes prolonged periods of downturns and overcapacity. Because we are, and will continue to be, dependentinvestment restrictions imposed on Taiwanese companies on the requirementsamount and types of electronicscertain investments that can be made in P.R.C. Our plans, investment applications and/or any relevant regulatory approvals to establish or possibly expand operations in P.R.C. may be delayed, interrupted, suspended or cancelled due to unforeseeable social and semiconductor companies forpolitical factors in R.O.C. or P.R.C.

Future expansions of our services, periodsoperations in R.O.C. will likely be handicapped by shortages in water and electricity, the limited availability of downturnscommercial-use land, and overcapacity in the general electronics and semiconductor industries could lead to reduced demand for overall semiconductor foundry services, including our services. If we cannot take appropriate actions such as reducing our costs to sufficiently offset declines in demand, our revenues, margin and earnings will suffer during periods of downturns and overcapacity.experienced human resources.

Decreases in demand and average selling prices for products that contain semiconductors may adversely affect demand for our products and may result in a decrease in our revenuesrevenue and earnings.

A vast majority of our revenue is derived from customers who use our services in communication devices, personal computers, consumer electronics products and industrial/standard products. The demand for our products are significantly affected by the outlook of the major and emerging end markets for our products, such as mobile devices, high-performance computing (including cryptocurrency mining), automotive electronics and the Internet of things (“IoT”). Any deterioration in or a slowdown in the growth of such end markets resulting in a substantial decrease in the demand for any one of these products may decrease the demand for overall global semiconductor foundry services, including our products and services, and maycould adversely affect our revenues.revenue. Further, semiconductor manufacturing facilities require substantial investment to construct and are largely fixed cost assets once they are in operation. Because we own most of our manufacturing capacities, a significant portion of our operating costs is fixed. In general, these costs do not decline when customer demand or our capacity utilization rates drop, and thus declines in customer demand, among other factors, may significantly decrease our margins. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, which can improve our margins. In addition, the historical and current trend of declining average selling prices (or “ASP”) of end use applications places downward pressure on the prices of the components that go into such applications. If the ASP of end use applications continues decreasing, the pricing pressure on components produced by us may lead to a reduction of our revenues,revenue, margin and earnings.

In light of the rise of new foundry service providers worldwide, ifSince we are unabledependent on the highly cyclical semiconductor and electronics industries, which have experienced significant and sometimes prolonged periods of downturns and overcapacity, our revenue, earnings and margins may fluctuate significantly.

The electronics industries and semiconductor market are cyclical and subject to compete effectivelysignificant and often rapid fluctuations in product demand, which could impact our semiconductor foundry business. Variations in order levels from our customers may result in volatility in our revenue and earnings. From time to time, the electronics and semiconductor industries have experienced significant, occasionally prolonged periods of downturns and overcapacity. Because we are, and will continue to be, dependent on the requirements of electronics and semiconductor companies for our services, periods of downturns and overcapacity in the highly competitivegeneral electronics and semiconductor industries could lead to reduced demand for overall semiconductor foundry segment of the semiconductor industry,services, including our services. If we may lose customers andcannot take appropriate actions such as reducing our profitcosts to sufficiently offset declines in demand, our revenue, margin and earnings may decrease.

The markets for our foundry services are highly competitive. We compete with other foundry service providers, as well as integrated device manufacturers that devote a significant portionwill likely suffer during periods of their manufacturing capacity to foundry operations. Some of these companies may have access to more advanced technologiesdownturns and greater financial and other resources than us, such as the possibility of receiving direct or indirect government bailout/economic stimulus funds or other incentives that may be unavailable to us. Our competition may, from time to time, also decide to undertake aggressive pricing initiatives in one or more technology nodes. Increases in these competitive activities may decrease our customer base, or our ASP, or both. If we are unable to compete with any and each of these new competitors with better technologies and manufacturing capacity and capabilities, we risk losing customers to these new contenders.overcapacity.

If we are unable to remain a technological leader in the semiconductor industry or if we are unable to timely respond to fast-changing semiconductor market dynamics, we may become less competitive.

The semiconductor industry and its technologies are constantly changing. We compete by developing process technologies using increasingly advanced nodes and on manufacturing products with more functions. We also compete by developing new derivative technologies. If we do not anticipate these changes in technologies and rapidly develop new and innovative technologies, or our competitors unforeseeably gain sudden access to additional technologies, we may not be able to provide foundry services on competitive terms. In addition, our customers have significantly decreased the time in which their products or services are launched into the market. If we are unable to meet these shorter producttime-to-market, we risk losing these customers. These factors have also been intensified by the shift of the global technology market to consumer driven products such as mobile devices, and increasing concentration of customers and competition (all further discussed among these risk factors). If we are unable to innovate new technologies that meet the demands of our customers or overcome the above factors, our revenuesrevenue may decline significantly. Although we have concentrated on maintaining a competitive edge in research and development, if we fail to achieve advances in technologies or processes, we may become less competitive.

In light of the rise of new foundry service providers worldwide, if we are unable to compete effectively in the highly competitive foundry segment of the semiconductor industry, we may lose customers and our profit margin and earnings may decrease.

The markets for our foundry services are highly competitive. We compete with other foundry service providers, as well as a number of integrated device manufacturers. Some of these companies may have access to more advanced technologies than us. Other companies may have greater financial and other resources than us, such as the possibility of receiving direct or indirect government subsidy, economic stimulus funds, or other incentives that may be unavailable to us. For example, Chinese companies are expected to be key players for new semiconductor fab development and fab equipment spending through 2020. There are over twenty new semiconductor fab projects that have been announced or are being developed within China in part due to various incentives provided by the Chinese government. Furthermore, our competitors may, from time to time, also decide to undertake aggressive pricing initiatives in one or several technology nodes. These competitive activities may decrease our customer base, or our ASP, or both. If we are unable to compete effectively with these new and aggressive competitors on technology, manufacturing capacity, and customer satisfaction, we risk losing customers to these new contenders.

If we are unable to manage our capacity and production facilities effectively, our competitiveness may be weakened.

We perform long termlong-term market demand forecast for our products and services to manage our overall capacity. Because market conditions are dynamic, our market demand forecast may change significantly at any time. During periods of decreased demand, certain manufacturing lines or tools in some of our manufacturing facilities may be suspended or shut down temporarily. However, if subsequent demand increases rapidly in a short period of time, we may not be able to restore the capacity in a timely manner.manner to take advantage of the upturn.

Recently,According to the market demand forecast, we have recently been adding capacity toin our 300mm wafer fabs in the Hsinchu Science Park, Southern Taiwan Science Parkto meet market needs for our products and Central Taiwan Science Park, based on our market demand forecast.services. Expansion and modification of our production facilitiescapacity will increase our costs. For example, we will need to purchase additional equipment, hire additional personnel and train personnel to operate the new equipment or hire additional personnel.equipment. If we do not increase our net revenue accordingly, our financial performance may be adversely affected by these increased costs. See “Item 4. Information on The Company —– Capacity Management and Technology Upgrade Plans” for a further discussion.

Having one or more large customers that account for a significant percentage of our revenue may render us vulnerable to the loss of or significant curtailment of purchases by such customers that could in turn adversely affect our results of operations. Similarly, the increasing consolidation of our customers may further increase our revenue concentration.

We may not be able to implementOver the years, our planned growth or development ifcustomer profile and the nature of our customers’ business have changed dramatically. While we are unable to obtain sufficient financial resources to meetgenerate revenue from hundreds of customers worldwide, our future capital requirements.

Planning capital requirements is challengingten largest customers in 2015, 2016, and 2017 accounted for approximately 63%, 69% and 67% of our net revenue in the highly dynamic, cyclicalrespective year. Our largest customer in 2015, 2016, and rapidly2017 accounted for 16%, 17% and 22% of our net revenue in the respective year. Our second largest customer in 2015 and 2016 accounted for 16% and 11% of our net revenue in the respective year. In 2017, our second largest customer accounted for less than 10% of our net revenue. A more concentrated customer base will subject our revenue to seasonal demand fluctuations from our large customers, and cause different seasonal patterns of our business. This customer concentration results in part from the changing dynamics of the electronics industry with the structural shift to mobile devices and applications and software that provide the content for such devices. There are only a limited number of customers who are successfully exploiting this new business model paradigm. Also, in order to respond to the new business model paradigm, we have seen the changes of nature in our customers’ business models. For example, there is a growing trend toward the rise of system houses that operate in a manner which makes their products and services more marketable in a changing consumer market. Also, since the global semiconductor industry especially during timesis becoming increasingly competitive, some of general market volatilityour customers have engaged in industry consolidations in order to remain competitive. Such consolidations have taken the fixed income, interest rates, foreign currenciesform of mergers and equities markets. From timeacquisitions. If more of our major customers consolidate, this will further decrease the overall number of our customer pool. The loss of, or significant curtailment of purchases by, one or more of our top customers, including curtailments due to time and increasingly so forincreased competitive pressures, industry consolidation, a change in their designs, or change in their manufacturing sourcing policies or practices of these customers, or the foreseeable next few years, we will continue to need significant capital to fundtiming of customer or distributor inventory adjustments, or change in our operations and managemajor customers’ business models may adversely affect our capacity in accordance with market demand. Our continued ability to obtain sufficient external financing is subject to a variety of uncertainties, including:

Sufficient external financingimprovement measures to enhance our cybersecurity network, and may also expose us to significant legal liabilities arising from or related to legal proceedings or regulatory investigations associated with, among other things, leakage of customer or third party information which we have an obligation to keep confidential. As of April 19, 2018, we had not be availablebeen aware of any material cyber attacks or incidents that had or would expected to have a material adverse effect on our business and operations, nor had we been involved in any legal proceedings or regulatory investigations related thereof.

In addition, we employ certain third party service providers for us on a timely basis, on reasonable market terms,and our affiliates worldwide with whom we need to share highly sensitive and confidential information to enable them to provide the relevant services. Despite that we require the third party service providers to comply with the confidentiality and/or Internet security requirements in our service agreements with them, there is no assurance that each of them will strictly fulfill such obligations, or at all. As a result,Theon-site network systems of and theoff-site cloud computing networks such as servers maintained by such service provider and/or its contractors are also subject to risks associated with cyber attacks. If we or our service providers are not able to timely resolve the respective technical difficulties caused by such cyber attacks, or ensure the integrity and availability of our data (and data belonging to our customers and other third parties) or control of our or our service providers’ computing systems, our commitments to our customers and other stakeholders may be forced to curtailmaterially impaired and our expansionresults of operations, financial condition, prospects and modification plans or delay the deployment of new or expanded services until we obtain such financing.reputation may also be materially and adversely affected as a result.

We may not be able to implement our planned growth and development or maintain our leading position if we are unable to recruit and retain qualifiedkey executives, managers and skilled technical and service personnel.

We rely on the continued services and contributions of our executive officers and skilled technical and other personnel. Our business could suffer if we lose, for whatever reasons, the services and contributions of some of these personnel and we cannot adequately replace them. We may be required to increase or reduce the number of employees in connection with any business expansion or contraction, in accordance with market demand for our products and services. Since there is intense competition for the recruitment of these personnel, we cannot ensure that we will be able to fulfill our personnel requirements in a timely mannermanner.

The retirement of Dr. Morris Chang, our Chairman who has led our Company for over three decades, may impose uncertainties on our business prospects.

In October 2017, our Chairman Dr. Morris Chang announced his plan to retire from the Company in June 2018. Dr. Chang will not be a director in the next term of the Board nor will he participate in any TSMC management activities. As Dr. Chang has led our Company for over three decades and is an iconic figure of the global semiconductor industry, his retirement may impose uncertainties on our business prospects.

We have developed a succession plan after long deliberation, according to which TSMC will be under the dual leadership of Dr. Mark Liu and Dr. C.C. Wei after the Annual Shareholders’ Meeting in early June 2018. Dr. Mark Liu will be the Chairman of the Board, and Dr. C.C. Wei will be the Chief Executive Officer. Except for Chairman Morris Chang, all present directors of the Board have agreed to be nominated, and if elected, serve as directors of the Board during the next term. Each of Dr. Mark Liu and Dr. C.C. Wei has been an economic upturn.executive officer of our Company for over 20 years, and we have a long-standing and stable management that would not have any significant change upon Dr. Chang’s retirement.

We may be unable to obtain in a timely manner and at a reasonable cost equipment that are necessary for us to remain competitive.

Our operations and ongoing expansion plans depend on our ability to obtain an appropriate amount of equipment and related services from a limited number of suppliers in a market that is characterized from time to time by limited supply and long delivery cycles. During such times, supplier-specific or industry-wide lead times for delivery can be as long as six months or more. To better manage our supply chain, we have implemented various business models and risk management contingencies with suppliers to shorten the procurement lead time. Further, the growing complexities especially in next-generation lithographic technologies may delay the timely availability of the equipment and parts needed to exploit time sensitive business opportunities and also increase the market price for such equipment and parts. If we are unable to obtain equipment in a timely manner to fulfill our customers’ demands on technology and production capacity, or at a reasonable cost, our financial condition and results of operations could be negatively impacted.

Our revenue and profitability may decline if we are unable to obtain adequate supplies of raw materials in a timely manner and at commercially reasonable prices.

Our production operations require that we obtain adequate supplies of raw materials, such as silicon wafers, gases, chemicals, and photoresist, on a timely basis.basis and at commercially reasonable prices. In the past, shortages in the supply of some materials, whether by specific vendors or by the semiconductor industry generally, have resulted in occasional industry-wide price adjustments and delivery delays. For example, the recent increase in silicon wafer prices due to increased demand for such wafers across the industry had a negative impact on our gross margin in 2017 and the trend is expected to continue in 2018. In addition, major natural disasters, political or economic turmoil occurring within the country of origin of such raw materials may also significantly disrupt the availability of such raw materials or increase their prices. Also, since we procure some of our raw materials from sole-source suppliers, there is a risk that our need for such raw materials may not be met or thatback-up supplies may not be readily available. Our revenue and earnings could decline if we are unable to obtain adequate supplies of the necessary raw materials in a timely manner or if there are significant increases in the costs of raw materials that we cannot pass on to our customers.

If the Ministry of Economic Affairs uses a substantial portion of our production capacity, we will not be able to service our other customers.

According to our agreement with the Industrial Technology Research Institute of Taiwan, or ITRI, the Ministry of Economic Affairs of the R.O.C., or an entity designated by the Ministry of Economic Affairs, has an option to purchase up to 35% of certain of our capacity, if our outstanding commitments to our customers are not prejudiced. Although the Ministry of Economic Affairs has never exercised this option, if this option is exercised to any significant degree during tight market conditions, we may not be able to provide services to all of our other customers unless we are able to increase our capacity accordingly or outsource such increased demand in a timely manner.

Any inability to obtain, preserve, enforce, defend and protect our technologies, and intellectual property rights and third-party licenses could harm our competitive position.

Our ability to compete successfully and to achieve future growth will dependdepends in part on the continued strength of our intellectual property portfolio. While we actively enforce and protect our intellectual property rights, there can be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of our proprietary technologies, software, trade secrets orknow-how. Also, we cannot assure you that, as our business or business models expand into new areas, we will be able to develop independently the technologies, patents, software, trade secrets orknow-how necessary to conduct our business or that we can do so without unknowingly infringing the intellectual property rights of others. As a result, we may have to rely on, to a certain degree, licensed technologies and patent licenses from others. To the extent that we rely on licenses from others, there can be no assurance that we will be able to obtain any or all of the necessary licenses in the future on terms we consider reasonable or at all. The lack of necessary licenses could expose us to claims for damages and/or injunctions from third parties, as well as claims for indemnification by our customers in instances where we have contractually agreed to indemnify our customers against damages resulting from infringement claims.

We have received, fromtime-to-time, communications from third parties asserting that our technologies, our manufacturing processes, or the design IPs of the semiconductors made by us or the use of those semiconductors by our customers may infringe their patents or other intellectual property rights. Because of the nature of the industry, we may continue to receive such communications in the future. These assertions have at times resulted in litigation. Recently, there has been a notable increase within the industry in the number of assertions made and lawsuits initiated by certain litigious,non-practicing entities and these litigious,non-practicing entities are also becoming more aggressive in their monetary demands and requests for court-issued injunctions. Such lawsuits or assertions may increase our cost of doing business and may potentially be extremely disruptive if thesenon-practicing entities succeed in blocking the trade of products and services offered by us.

We have or are expanding See “Item 8. Financial Information – Legal Proceedings” for a further discussion. Also, as we expanded our manufacturing operations into certain offshore jurisdictions. Tonon-R.O.C jurisdictions, we have faced increasing challenges to manage risks of intellectual property misappropriation. Despite our efforts to adopt robust measures to mitigate the risk of intellectual property misappropriation in such new jurisdictions, we have implemented heightened safeguards against such misappropriation.cannot guarantee that the protection measures we adopted will be sufficient to prevent us from potential infringements by others, or at all.

If we fail to obtain or maintain certain technologies or intellectual property licenses (oror fail to prevent our intellectual property from being misappropriated)misappropriated and, if litigation relating to alleged intellectual property matters occurs, it could: (i) prevent us from manufacturing particular products or selling particular services or applying particular technologies; and (ii) reduce our ability to compete effectively against entities benefiting from our misappropriated intellectual property, which could reduce our opportunities to generate revenues. See “Item 8. Financial Information — Legal Proceedings” for a further discussion.revenue.

Our operational results could also be materially and adversely affected by natural disasters (such as earthquakes), shortages or interruptions in the supply of utilities (such as shortages in electricity caused by changes in governmental energy policy), in the locations in which we, our customers or our suppliers operate or by industrial accidents, fires or explosions.

The frequency and severity of natural disasters and severe weather has been increasing, in part due to climate change or systemic regional geological changes that manifest in damaging earthquakes. We arehave manufacturing and other operations in locations subject to natural disasters, such as flooding, earthquakes, tsunamis, and droughts as well as interruptions or shortages in the risksupply of loss dueutilities, such as water and electricity, or access to explosion and fire becauseland, air or sea infrastructures, that could disrupt operations. In February 2016, Taiwan, in which the majority of our manufacturing fabs are located, suffered an earthquake that damaged some of our wafers and equipment and resulted in wafer delivery delays in the materials we usefirst quarter of 2016. In addition, our suppliers and customers also have operations in such locations. For example, most of our manufacturing processes are highly combustible.

We andproduction facilities, as well as those of many of our suppliers use highly combustible and toxic materialscustomers and upstream providers of complementary semiconductor manufacturing services, are located in Taiwan and Japan, which are susceptible to earthquakes, tsunamis, flooding, typhoons, and droughts from time to time that may cause shortages in electricity and water or interruptions to our operations. Further, we have occasionally suffered power outages or surges in Taiwan caused by difficulties encountered by our electricity supplier, the Taiwan Power Company, or other power consumers on the same power grid, which have resulted in interruptions to our operations. Such shortages or interruptions in our electricity supply could further be exacerbated by changes in the energy policy of the government which will make Taiwan a nuclear-free country by 2025. If we are unable to secure reliable and uninterrupted supply of electricity to power our manufacturing processes and are therefore subjectfabs within Taiwan, our ability to satisfy the orders of our customers will be severely undercut.

Thus, if one or more natural disasters, shortage or interruptions to the risksupply of loss arising from explosion, fire,utilities (such as shortages in electricity caused by a nuclear-free energy policy) that results in a prolonged disruption to our operations or environmental influences which cannot be completely eliminated. Although we maintain many overlapping risk prevention and protection systems, as well as fire and casualty insurance, our risk management and insurance coverage may not be sufficient to cover allthose of our potential losses. Ifcustomers or suppliers, or if any of our fabs or vendor facilities were to be damaged or cease operations as a result of an explosion fire, or environmental influences,fire, it could reduce our manufacturing capacity and may cause us to lose important customers, thereby having a potentially adverse and material impact on our operational and financial performance.

Adverse fluctuations in exchange rates could decrease our operating margin and/or revenue.

More than 90% of our sales are denominated in U.S. dollar and overone-half of our capital expenditures are denominated in currencies other than NT dollar, primarily in U.S. dollar, Japanese yen and Euro. Because our functional currency is denominated in NT dollar, any significant fluctuation to our disadvantage in such exchange rates would have an adverse effect on our financial condition. For example, every 1% depreciation of the U.S. dollar against the NT dollar would result in approximately 0.4 percentage point decrease in our operating margin based on our 2017 results.

Conversely, if the U.S. dollar appreciates significantly versus other major currencies, the demand for the products and services of our customers and for our goods and services will likely decrease, which will negatively affect our revenue. Please see “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a further discussion on the possible impact of other market factors on our results of operations.

Our failure to comply with applicable laws and regulations material to our operations such as export control, environmental and climate related laws and regulations, or the inability to timely obtain requisite approvals necessary for the conduct of our business, such as fab land and construction approvals, could harm our business and operational results or subject us to potential significant legal liability.

Because we engage in manufacturing activities in multiple jurisdictions and conduct business with our customers located worldwide, such activities are subject to a myriad of governmental regulations. For example, the manufacturing, assembling and testing of our products require the use of metals, chemicals, and materials that are subject to environmental, climate-related, health and safety, and humanitarian conflict-free sourcing laws, regulations and guidelines issued worldwide. Our failure to comply with any such laws or regulations, as amended from time to time, and our failure to comply with any information and document sharing requests from the relevant authorities in a timely manner could result in:

Complying with applicable laws and regulations, such as environmental and climate related laws and regulations, could also require us, among other things, to do the following: (a) purchase, use or install remedial equipments; (b) implement remedial programs such as climate change mitigation programs; (c) modify our product designs and manufacturing processes, or incur other significant expenses such as obtaining substitute raw materials or chemicals that may cost more or be less available for our operations.

Our inability to timely obtain approvals necessary for the conduct of our business could impair our operational and financial results. For example, if we are unable to timely obtain environmental related approvals needed to undertake the development and construction of a new fab or expansion project, then such inability may delay, limit, or increase the cost of our expansion plans that could also in turn adversely affect our business and operational results. In light of increased public interest in environmental issues, our operations and expansion plans may be adversely affected or delayed responding to public concern and social environmental pressures even if we comply with all applicable laws and regulations.

For further details, please see our compliance record with Taiwan and international environmental and climate related laws and regulations as well as our business continuity management of climate change policy in “Item 4. Information on The Company – Environmental and Climate Related Laws and Regulations”.

Any adverse results of our pending antitrust proceeding or other similar proceedings that we may be subject to could harm our business and operational results or subject us to potential significant legal liability.

We are subject to antitrust laws and regulations in the jurisdictions where we operate our business or sell our products. On September 28, 2017, we were contacted by the European Commission (the “Commission”), which has asked us for information and documents concerning alleged anti-competitive practices in relation to semiconductor sales. We are cooperating with the Commission to provide the requested information and documents. In light of the fact that this proceeding is still in its preliminary stage, it is premature to predict how the case will proceed, the outcome of the proceeding or its impact. Any adverse results of such proceeding or other similar proceedings that we may be subject to could harm our business and distract our management, and thereby have a material adverse effect on our results of operations or prospects, and subject us to potential significant legal liability.

Any impairment charges may have a material adverse effect on our net income.

Under IFRSs, we are required to evaluate our investments, tangible assets and intangible assets for impairment whenever triggering events or changes in circumstances indicate that the asset may be impaired. If certain criteria are met, we are required to record an impairment charge. We are also required under IFRSs to evaluate goodwill for impairment at least on an annual basis or more frequently whenever triggering events or changes in circumstances indicate that goodwill may be impaired and the carrying value may not be recoverable. We hold investments in certain publicly listed and private companies, some of which have incurred certain impairment charges as discussed further in our financial statements. We are not able to estimate the extent or timing of any impairment charge for future years. Any impairment charge required may have a material adverse effect on our net income.

The determination of an impairment charge at any given time is based significantly on the projected results of operations over a number ofseveral years subsequent to that time. Consequently, an impairment charge is more likely to occur during a period when our operating results are otherwise already depressed. See “Item 5. Operating and Financial Reviews and Prospects —– Critical Accounting Policies Andand Judgments” for a discussion of how we assess if an impairment charge is required and, if so, how the amount is determined.

Having one or more large customers that account for a significant percentage of our revenues may render us vulnerable to the loss of or significant curtailment of purchases by one or more large customers that could in turn adversely affect our results of operations. Similarly, the increasing consolidation of our customers may further increase our revenue concentration.

Over the years, our customer profile and the nature of our customers’ business have changed dramatically. While we generate revenue from hundreds of customers worldwide, our ten largest customers accounted for approximately 62%, 63 % and 63% of our net revenue in 2013, 2014 and 2015, respectively. Our largest customer accounted for 22%, 21% and 16% of our net revenue in 2013, 2014 and 2015, respectively. Our second largest customer in 2015 accounted for 16% of our net revenue, with 9% and 1% in 2014 and 2013, respectively. This customer concentration results in part from the changing dynamics of the electronics industry with the structural shift to mobile devices and applications and software that provide the content for such devices. There are only a limited number of customers who are successfully exploiting this new business model paradigm. Also, in order to respond to the new business model paradigm, we have seen the changes of nature in our customers’ business models. For example, there is a growing trend toward the rise of system houses that operate in a manner which make their products and services more marketable in a changing consumer market. Also, since the global semiconductor industry is becoming increasingly competitive, some of our customers have engaged in industrial consolidations in order to remain competitive. Such consolidations have taken the form of mergers and acquisitions. If more of our major customers consolidate, this will further decrease the overall number of our customer pool. The loss of, or significant curtailment of purchases by, one or more of our top customers, including curtailments due to increased competitive pressures, industrial consolidation, a change in their designs, or change in their manufacturing sourcing policies or practices of these customers, or the timing of customer or distributor inventory adjustments, or change in our major customers’ business models may adversely affect our results of operations and financial condition.

Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business and results of operations.

Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud and corruption, our reputation and results of operations could be harmed.

We are required to comply with various R.O.C. and U.S. laws and regulations on internal controls. But internal controls may not prevent or detect misstatements because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, fraud or corruption. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, our business and operating results could be harmed, we could fail to meet our reporting obligations, and there could be a material adverse effect on the market price of our common shares and ADSs.

Our global manufacturing, design and sales activities subject usAny amendments to risks associated with legal, political, economicexisting tax regulations or other conditions or developments in various jurisdictions, including in particular the R.O.C., which could negatively affect our business and financial status and therefore the market valueimplementation of your investment.

The majority of our principal executive officers and our principal production facilities are locatedany new tax laws in the R.O.C., and a substantial majority of our net revenues are derived from our operations in the R.O.C. In addition, we have operations worldwide and a significant percentage of our revenue comes from sales to locations outside the R.O.C. Operating in the R.O.C. and overseas exposes us to changes in policies and laws, as well as the general political, economic and social conditions, outbreak of warUnited States or hostilities, terrorism, security risks, social unrests, protests, strikes, health conditions and possible disruptions in transportation networks, in the various countriesother jurisdictions in which we operate which could result in an adverse effect on our business operations in such countries and our results of operations as well as the market price and the liquidity of our ADSs and common shares.

For example, the financial markets have viewed certain past developments in relations between the R.O.C. and P.R.C. as occasions to depress general market prices of the securities of Taiwanese companies, including our own. In addition, the R.O.C. government has not lifted some trade and investment restrictions imposed on Taiwanese companies on the amount and types of certain investments that can be made in P.R.C. In addition to the above factors, future expansions of our operations in Taiwan will likely be handicapped by shortages in water and electricity, the limited availability of commercial-use land, and experienced human resources. Our plans, investment applications and/or any relevant regulatory approvals to establish or possibly expand operations in China may be delayed, interrupted, suspended or cancelled due to unforeseeable social and political factors in Taiwan or China.

Our operational results could also be materially and adversely affected by natural disasters (such as earthquakes), shortages or interruptions in the supply of utilities (such as shortages in electricity caused by changes in governmental energy policy), in the locations in which we, our customers or our suppliers operate.

The frequency and severity of natural disasters and severe weather has been increasing, in part due to climate change or systemic regional geological changes that manifest in damaging earthquakes. We have manufacturing and other operations in locations subject to natural disasters, such as flooding, earthquakes, tsunamis, highly polluted air conditions and droughts as well as interruptions or shortages in the supply of utilities, such as water and electricity, or access to land, air or sea infrastructures, that could disrupt operations. We source key raw materials from locations subject to natural disasters, such as severe weather, flooding, earthquakes, tsunamis, and droughts, and any major natural disaster occurring in any such locations may cause disruptions to our business, operations and financial performance. As recently as February 6, 2016, Taiwan, in which the majority of our manufacturing fabs are located, suffered an earthquake that damaged some of our wafers and equipment and resulted in wafer delivery delays in the first quarter. In addition, our suppliers and customers also have operations in such locations. For example, most of our production facilities, as well as those of many of our suppliers and customers and upstream providers of complementary semiconductor manufacturing services, are located in Taiwan and Japan, which are susceptible to earthquakes, tsunamis, flooding, typhoons, and droughts from time to time that may cause shortages in electricity and water or interruptions to our operations. In addition, we have occasionally suffered power outages or surges in Taiwan caused by difficulties encountered by our electricity supplier, the Taiwan Power Company, or other power consumers on the same power grid, which have resulted in interruptions to our operations. Such shortages or interruptions in our electricity supply could further be exacerbated by potential changes in the energy policy of the government which intends to make Taiwan a nuclear-free country by 2025. If we are unable to secure reliable and uninterrupted supply of electricity to power our manufacturing fabs within Taiwan, our ability to satisfy the orders of our customers will be severely undercut.

One or more natural disasters, shortage or interruptions to the supply of utilities (such as shortages in electricity caused by a nuclear-free energy policy) that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, may adversely affect the results of our operations and financial conditions.

Our failure to comply with applicable environmental and climate related laws and regulations, as well as international laws, regulations and accords to which we are subject, could also harm our business and operational results.

The manufacturing, assembling and testing of our products require the use of metals, chemicals, minerals and materials that are subject to environmental, climate-related, health and safety, and humanitarian conflict-free sourcing laws (such as the U.S. SEC rule for filing Form SD to disclose the origins of certain strategic minerals), regulations and guidelines issued worldwide. Although we may be eligible for various exemptions and/or extensions of time for compliance, our failure to comply with any of these applicable laws or regulations could result in:

Existing and future environmental and climate related laws and regulations as well as applicable international accords to which we are subject, could also require us, among other things, to do the following: (a) purchase, use or install expensive pollution control, reduction or remediation equipment; (b) implement climate change mitigation programs and “abatement or reduction of greenhouse gas emissions” programs, or “carbon credit trading” programs; (c) modify our product designs and manufacturing processes, or incur other significant expenses associated with such laws and regulations such as obtaining substitute raw materials or chemicals that may cost more or be less available for our operations. It is still unclear whether such necessary actions would affect the reliability or efficiency of our products and services.

The above contingencies resulting from the actual and potential impact of local or international laws and regulations, as well as international accords on environmental or climate change, could harm our business and operational results by increasing our expenses or requiring us to alter our manufacturing and assembly and test processes. For further details, please see our compliance record with Taiwan and international environmental and climate related laws and regulations in “Item 4. Information on The Company — Environmental Regulations”.

Climate change, other environmental concerns and green initiatives also present other commercial challenges, economic risks and physical risks that could harm our operational results or affect the manner in which we conduct our business.

Increasing climate change and environmental concerns could affect the results of our operations if any of our customers request that we provide products and services that exceed any existing standard(s) of environmental compliance. If we are unable to offer such products or offer products that are compliant, but are not as reliable due to the lack of reasonably available alternative technologies or materials, we may lose market share to our competitors.

In addition, our inability to timely obtain environmental related approvals needed to undertake the development and construction of a new fab or expansion project may delay, limit, or increase the cost of our expansion plans that could also in turn adversely affect our business and operational results. In light of increased public interest in environmental issues, our operations and expansion plans may be adversely affected or delayed responding to public concern and social environmental pressures even if we comply with all applicable laws and regulations.

Further, energy costs in general could increase significantly due to climate change, environmental concern and other regulations. Therefore, our energy costs may increase significantly if utility or power companies pass on their costs, either fully or partially, such as those associated with carbon taxes, emission caps and carbon credit trading programs. For further details, please see details of our business continuity management of climate change policy in “Item 4. Information on The Company – Environmental Regulation”.

To mitigate risks resulting from climate change, we continue to actively carry out energy conservation measures and voluntary perfluorinated compounds (PFC) emission reduction projects, and conduct greenhouse gas inventories verification every year.

Adverse fluctuations in exchange rates could decrease our operating margin and/or revenues.

Over one-half of our capital expenditures and manufacturing costs are denominated in currencies other than NT dollars, primarily in U.S. dollars, Japanese yen and Euros. In 2015, more than 90% of our revenues were denominated in U.S. dollars and currencies other than NT dollars. Therefore, any significant fluctuation to our disadvantage in such exchange rates would have an adverse effect on our financial condition. For example, becausenet income.

While we are subject to tax laws and regulations in various jurisdictions in which we operate or conduct business, our functional currency is denominatedprincipal operations are conducted in NT dollars, every 1% depreciationthe R.O.C. and we are exposed primarily to taxes levied by the government of the U.S. dollar againstR.O.C. Effective from 2018, the NT dollar exchangeR.O.C. Income Tax Law was amended, which abolished the imputation system, raised the corporate income tax rate may resultfrom 17% to 20%, and reduced the rate of surtax imposed on unappropriated earnings from 10% to 5%. However, since we are still eligible for a five-year tax exemption for capital investments made in approximately 0.4 percentage point decrease inprevious years, we do not expect the R.O.C. tax amendment to have a significant impact on our operating margineffective tax rate for 2018. See “Item 5. Operating and Financial Reviews and Prospects – Taxation” for further discussion of significant tax regulation changes. However, these assessments on potential impacts are based on our 2015 results.

Conversely, ifcurrent operations. As such, any future changes in our operations, financial condition or other existing tax regulations or the U.S. dollar appreciates significantly versusimplementation of any new tax laws in the R.O.C., the United States or other major currencies, the demand for the products and services ofjurisdictions in which we operate our customers and for our goods and services will likely decrease, which will negatively affect our revenues. Please see “Item 11. Quantitative and Qualitative Disclosures About Market Risk” forbusiness may have a further discussion on the possible impact of other market factorsmaterial adverse effect on our results of operations.net income.

Fluctuations in inflationary and deflationary expectations and resulting general market volatility could negatively affect costs of and demand for our products and services, which may harm our financial results.

The global economy is becoming more vulnerable to sudden unexpected fluctuations in inflationary and deflationary expectations and conditions. BothExpectations of high inflation and deflation each adversely affect anaffects the economy, at both the macro and micro levels, by reducing economic efficiency and disrupting saving and investment decisions. Recently, dramatic fallFor example, recent implementation of “balance sheet normalization” program by the U.S. Federal Reserve and the possible changes in oil prices and negative interest rateseconomic, fiscal and/or trade policies in major world economiesthe U.S. have exacerbated global fluctuations in inflationary and deflationary expectations. These macro-economic changes have resulted in general market volatility across all assets classes. Such fluctuations and volatility may negatively affect the costs of our operations and the business operations of our customers who may be forced to plan their purchases of our goods and services within an uncertain economy. Therefore, the demand for our products and services could unexpectedly fluctuate severely in accordance with expectations of inflation or deflation as affected by macro market volatility. Please see “Item 5. Operating and Financial Reviews and Prospects —– Inflation & Deflation” for a further discussion.

Amendments to existing tax regulations or new tax legislation in the R.O.C. may have an adverse effect on our net income.

While we are subject to tax laws and regulations in various jurisdictions in which we operate or conduct business, our principal operations are conducted in the R.O.C. and we are exposed primarily to taxes levied by the government of the R.O.C. Any unfavorable changes of tax laws and regulations in this jurisdiction could increase our effective tax rate and have an adverse effect on our operating results. See “Item 5. Operating and Financial Reviews and Prospects – Taxation” for further discussion of significant tax regulation changes.

If certain of our strategic investments fail to achieve their respective forecasted returns or objectives, we may suffer financial losses that may materially lower our profit margin and distributable earnings.

From time to time, we have made or will make a series of strategic investments. There is no guarantee that any of such investments will be successful commercially. Any such investment will incur risks, which may result in losses even with careful management. Any such loss resulting from such investments may result in significant impairment charges, lower profit margin and ultimately lower distributable earnings.

If our internet security systems succumb to cyber attacks initiated by third party entities worldwide, our manufacturing as well as daily operations may be severely interrupted or shutdown indefinitely that may materially harm our financial results, our commitments to our customers and stakeholders, and corporate goodwill.

Even though we have established a comprehensive internet and computing security network, we cannot guarantee that our computing systems which control or maintain vital corporate functions like our manufacturing operations and enterprise accounting would be completely immune to crippling cyber viral attacks launched by third party to gain unauthorized access to our internal network systems to sabotage our operations and goodwill. In the event of a serious cyber attack, our systems may lose important corporate data and our production lines may be shutdown indefinitely pending the resolution of such attack. These cyber attacks may also attempt to steal our trade secrets and other intellectual properties and other sensitive information, such as personal information of our employees and proprietary information of our customers and other stakeholders. Malicious hackers may also try to introduce computer viruses or corrupted software into our network systems to disrupt our operations or spy for sensitive information. These attacks may result in us having to pay damages for our delayed or disrupted orders or incur significant expenses in attempting to re-establish control over our network. If we are not able to timely resolve the technical difficulties caused by such cyber attacks, our financial results as well as our commitments to our customers and other stakeholders may be materially impaired.

Risks Relating to Ownership of ADSs

Your voting rights as a holder of ADSs will be limited.

Holders of American Depositary Receipts (ADRs) evidencing ADSs may exercise voting rights with respect to the common shares represented by these ADSs only in accordance with the provisions of our ADS deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our common shares, the depositary bank will, as soon as practicable thereafter, mail to the holders (i) the notice of the meeting sent by us, (ii) voting instruction forms and (iii) a statement as to the manner in which instructions may be given by the holders.

ADS holders will not generally be able to exercise the voting rights attaching to the deposited securities on an individual basis. According to the provisions of our ADS deposit agreement, the voting rights attaching to the deposited securities must be exercised as to all matters subject to a vote of shareholders collectively in the same manner, except in the case of an election of directors. Election of directors is by means of cumulative voting. See “Item 10. Additional Information —– Voting of Deposited Securities” for a more detailed discussion of the manner in which a holder of ADSs can exercise its voting rights.

You may not be able to participate in rights offerings and may experience dilution of your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under our ADS deposit agreement, the depositary bank will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the United States Securities Act of 1933, as amended, (the “Securities Act”), with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. Although we may be eligible to take advantage of certain exemptions for rights offerings by certain foreign companies, we can give no assurance that we can establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to have such a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

If the depositary bank is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

The value of your investment may be reduced by possible future sales of common shares or ADSs by us or our shareholders or fluctuations in foreign exchange.

One or more of our existing shareholders may, from time to time, dispose of significant numbers of our common shares or ADSs. For example, the National Development Fund of Taiwan, R.O.C. which owned 6.38% of TSMC’s outstanding shares as of February 29, 2016, has28, 2018, had from time to time in the past sold our shares in the form of ADSs in several transactions.

We cannot predict the effect, if any, that future sales of ADSs or common shares, or the availability of ADSs or common shares for future sale, will have on the market price of ADSs or common shares prevailing from time to time. Sales of substantial amounts of ADSs or common shares in the public market, or the perception that such sales may occur, could depress the prevailing market price of our ADSs or common shares. In addition, fluctuations in the exchange rate between the U.S. dollar and the NT dollar may affect the U.S. dollar value of our common shares and the market price of the ADSs and of any cash dividends paid in NT dollars on our common shares represented by ADSs.

The market value of our shares may fluctuate due to the volatility of, and government intervention in, the R.O.C. securities market.

The Taiwan Stock Exchange experiences from time to time substantial fluctuations in the prices and volumes of sales of listed securities. There are currently limits on the range of daily price movements on the Taiwan Stock Exchange. In response to past declines and volatility in the securities markets in Taiwan, and in line with similar activities by other countries in Asia, the government of the R.O.C. formed the Stabilization Fund, which has purchased and may from time to time purchase shares of Taiwan companies to support these markets. In addition, other funds associated with the R.O.C. government have in the past purchased, and may from time to time purchase, shares of Taiwan companies on the Taiwan Stock Exchange or other markets. These funds have disposed and may from time to time dispose shares of Taiwan companies so purchased at a later time. In the future, market activity by government entities, or the perception that such activity is taking place, may take place or has ceased, may cause fluctuations in the market prices of our ADSs and common shares.

Our History and Structure

Our legal and commercial name is(Taiwanis台灣積體電路製造股份有限公司 (Taiwan Semiconductor Manufacturing Company Limited). We believe we are currently the world’s largest dedicated foundry in the semiconductor industry. We were founded in 1987 as a joint venture among the R.O.C. government and other private investors and were incorporated in the R.O.C. on February 21, 1987. Our common shares have been listed on the Taiwan Stock Exchange since September 5, 1994, and our ADSs have been listed on the New York Stock Exchange since October 8, 1997.

Our Principal Office

Our principal executive office is located at No. 8,Li-Hsin Road 6, Hsinchu Science Park, Hsinchu, Taiwan, Republic of China. Our telephone number at that office is(886-3)563-6688. Our web site iswww.tsmc.com. Information contained on our website is not incorporated herein by reference and does not constitute part of this annual report.

Business Overview of the Company

As a foundry, we manufacture semiconductors using our manufacturing processes for our customers based on their own or third parties’ proprietary integrated circuit designs. We offer a comprehensive range of wafer fabrication processes, including processes to manufacture CMOScomplementary metal oxide silicon (“CMOS”) logic, mixed-signal, radio frequency (“RF”), embedded memory, BiCMOSbipolar complementary metal oxide silicon (“BiCMOS”, which uses CMOS transistors in conjunction with bipolar junction transistor) mixed-signal and other semiconductors. We estimate that our revenue market segment share among total foundries worldwide was 55%56% in 2015.2017. We also offer design, mask making, bumping, probing, and assembly and testing services.

We believe that our large capacity, particularly for advanced technologies, is a major competitive advantage. Please see “—“– Manufacturing Capacity and Technology” and “—“– Capacity Management and Technology Upgrade Plans” for a further discussion of our capacity.

We count among our customers many of the world’s leading semiconductor companies, ranging from fabless semiconductor companies, system companies to integrated device manufacturers, including, but not limited to, Advanced Micro Devices, Inc., Bitmain Technologies Limited, Broadcom Limited, Hisilicon Technologies Co., Ltd., Intel Corporation, Huawei Tech, Marvell Technology Group Ltd., MediaTek Inc., NVIDIA Corporation, NXP Semiconductors N.V., OmniVision Technologies Inc., Qualcomm Inc., Sony Corporation Spreadtrum Communications, Inc. and Texas Instruments Inc. Fabless semiconductor and system companies accounted for approximately 81%80%, and integrated device manufacturers accounted for approximately 18%20% of our net revenue in 2015.2017.

Growth Opportunities

In light of the rapid growth in four major markets, namely mobile, high-performance computing, automotive electronics, and IoT, and the fact that focus of customer demand is shifting from process-technology-centric to product-application-centric, we have constructed four different technology platforms to provide customers with the most comprehensive and competitive logic process technologies, specialty technologies, intellectual properties, and packaging and testing technologies to shorten customers’time-to-design andtime-to-market.

Mobile platform: We offer leading process technologies such as7-nanometer Fin Field-Effect Transistor (“FinFET”),10-nanometer FinFET,16-nanometer FinFET Plus (“16FF+”) technology, and20-nanometersystem-on-chip (“SoC”) logic process technologies, as well as comprehensive intellectual properties for premium product applications to further enhance chip performance, reduce power consumption, and decrease chip size. Forlow-end tohigh-end product applications, we offer leading process technologies such as12-nanometer FinFET compact technology (“12FFC”),16-nanometer FinFET compact technology (“16FFC”),28-nanometer high performance compact (“HPC”),28-nanometer high performance mobile compact plus (“28HPC+”), and22-nanometerultra-low power (“22ULP”) logic process technologies, in addition to comprehensive intellectual properties, to satisfy customer needs for high-performance andlow-power chips. Furthermore, for premium,high-end, mid-end, andlow-end product applications, we also offer the most competitive, leading-edge specialty technologies, including radio frequency (“RF”), embedded flash memory, emerging memory technologies, power management, sensors, and display chips as well as advanced packaging technologies such as the leading integratedfan-out (“InFO”) technology.

High-performance computing platform:We provide customers with leading process technologies such as 7-nanometer FinFET and 16-nanometer FinFET(“16FF”), as well as comprehensive intellectual properties, including high-speed interconnect intellectual properties, to meet customers’ high-performance computing and communication requirements. We also offer multiple advanced packaging technologies such as chip on wafer on substrate (“CoWoS^®”) and three-dimensional integrated circuits technologies to enable homogeneous and heterogeneous chip integration to meet customers’ performance, power, and system footprint requirements. We will continue to optimize our high-performance computing platform offerings to help customers capture market growth driven by data explosion and application innovation.

Automotive electronics platform: We offer leading 7-nanometer FinFET, 16FF,28-nanometer, and40-nanometer logic process technologies, various leading and competitive specialty technologies in RF, embedded flash memory, sensors, multiple power management technologies that pass theAEC-Q100 qualifications.

Internet of things (“IoT”) platform:We provide industry’s leading and comprehensiveultra-low power technology platform to support innovations for IoT and wearable applications. Our leading offerings, including55-nanometer ULP,40-nanometer ULP,28-nanometer ULP,22-nanometerULP/ultra-low leakage (“ULL”), have been widely adopted by various IoT and wearable applications. We extend our offering with Near Threshold Voltage (“NVT”) technology for extreme low power applications. We also offer the most competitive and leading-edge specialty technologies in RF, embedded flash memory, emerging memory, sensors, and display chips, as well as multiple advanced packaging technologies including leading InFO technology.

Our Semiconductor Facilities

We currently operate one 150mm wafer fab, six 200mm wafer fabs, four 300mm wafer fabs, and three 300mm waferadvanced backend fabs. Our corporate headquarters and fiveseven of our fabs are located in the Hsinchu Science Park, twoone fab is located in the Central Taiwan Science Park, three fabs are located in the Southern Taiwan Science Park, one fab is located in the Central Taiwan Science Park,United States, one fab is located in the United States,Shanghai, and one fab is located in Shanghai.Nanjing. Our corporate headquarters and our fiveseven fabs in Hsinchu occupy parcels of land of a total of approximately 613,804627,111 square meters. We leasehave leased these parcels from the Hsinchu Science Park Administration in Hsinchu under agreements that will be up for renewal between May 2019 and March 2017 and December 2034.2037. We have leased from the Central Taiwan Science Park Administration a parcel of land of approximately 564,619 square meters for our Taichung fabs under agreements that will be up for renewal between September 2029 and December 2034. We have leased from the Southern Taiwan Science Park Administration approximately 765,4201,189,885 square meters of land for our fabs in the Southern Taiwan Science Park under agreements that will be up for renewal between April 2018 and July 2017 and March 2035.2037. We also own approximately 143,215 square meters of land located in Miaoli, Taiwan. WaferTech, LLC (“WaferTech”) owns a parcel of land of approximately 1,052,186 square meters in the State of Washington in the United States, where the WaferTech fab and related offices are located. TSMC China owns the land use rights of 369,087 square meters of land in Shanghai, where Fab 10 and related offices are located. TSMC Nanjing owns the land use rights of 453,401 square meters of land in Nanjing, where Fab 16 and related offices are located. Other than certain equipment under leases located at testing areas, we own all of the buildings and equipment for our fabs. In addition, as part of our plan to expand our operations in China, we have applied to and received permission from the Investment Commission of the R.O.C. Ministry of Economic Affairs on February 3, 2016, and entered into an investment agreement with the municipal government of Nanjing, China on March 28, 2016, to establish a wholly-owned subsidiary managing 300mm wafer fab and design service center with volume production of 16nm process technology scheduled to begin in the second half of 2018. Also, the total capital investment will be approximately US$3 billion.

Semiconductor Manufacturing Capacity and Technology

We manufacture semiconductors on silicon wafers based on proprietary circuitry designs provided by our customers or third party designers. Two key factors that characterize a foundry’s manufacturing capabilities are output capacity and fabrication process technologies. Since our establishment, we have possessed the largest capacity among the world’s dedicated foundries. We also believe that we are the technology leader among the dedicated foundries in terms of our net revenue of advanced semiconductors with a resolution of 28-nanometer and below, and are one of the leaders in the semiconductor manufacturing industry generally. We are the first dedicated foundry with proven low-k interconnect technology in commercial production from the 0.13 micron node down to 28-nanometer node. In 2014,2017, we startedcontinued volume production of 20-nanometer10-nanometer technology, successfully completed7-nanometer technology qualification for volume production and continued thestarted full development of 16- and 10-nanometer technologies. In 2015, we started volume production of 16-nanometer technology and continued the development of 10- and 7-nanometer technologies.5-nanometer technology.

The following table lists our fabs and those of our affiliates in operation as of February 28, 2018, together with the year of commencement of commercial production, wafer size and the most advanced technology for volume production:

In 2015,2017, our annual capacity (in 300mm12-inch equivalent wafers) was approximately 911 million wafers, compared to approximately 810 million wafers in 2014.2016. This increase was primarily from the expansion of our 16-nanometer10-nanometer advanced technology.

Capacity Management and Technology Upgrade Plans

We performmanage our overall capacity and technology upgrade plans based on long term market demand forecast for our products and services to manage our overall capacity and technology upgrade plans.services. According to our current market demand forecasts,forecast, we intend to maintain ourthe strategy of expanding manufacturing capacity and upgrading manufacturing technologies to meet both the fabrication and the technology needs of our customers.

Our capital expenditures in 2013, 20142015, 2016 and 20152017 were NT$287,595257,517 million, NT$288,540328,045 million, and NT$257,517330,588 million (US$8,12310,859 million, translated from a weighted average exchange rate of NT$31.730.45 to US$1.00), respectively. Our capital expenditures in 20162018 are expected to be approximatelybetween US$910.5 billion to US$1011 billion, which, depending on market conditions, may be adjusted later. Our capital expenditures for 2013 were funded by our operating cash flow2015, 2016 and the issuance of corporate bonds and the capital expenditures for 2014 and 20152017 were funded by operating cash flow. Our capital expenditures for 20162018 are expected to be funded primarily by our operating cash flow. In 2016,2018, we anticipate our capital expenditures to focus primarily on the following:

These investment plans are still preliminary and may change according to market conditions.

Markets and Customers

The primary customers of our foundry services are fabless semiconductor companies, systemssystem companies and integrated device manufacturers. The following table presents the breakdown of net revenue, including foundry services and others, by type of customers during the last three years:

In terms of customer type, the increase in our net revenue from 2016 to 2017 was mainly attributed to an increase in orders from integrated device manufacturers of NT$33,152 million, or a 21% year-over-year increase. The increase in our net revenue from 2015 to 2016 was mainly attributed to an increase in orders from fabless semiconductor companies/system companies of NT$102,088 million, or a 15% year-over-year increase.

We categorize our net revenue mainly based on the country in which the customer is headquartered, which may be different from the net revenue for the countries to which we actually sell or ship our products or different from where products are actually ordered. Under this approach, the following table presents a regional geographic breakdown of our net revenue during the last three years:

In 2017, our net revenue increased by NT$29,509 million from 2016, which was mainly due to an increase in orders from China of NT$28,098 million, or a 33% year-over-year increase, from Japan of NT$18,145 million, or a 37% year-over-year increase, and from EMEA of NT$10,496 million, or an 18% year-over-year increase. The increase was partially offset by a decrease in orders from Asia Pacific of NT$35,607 million, or a 25% year-over-year decrease. In 2016, our net revenue increased by NT$104,441 million from 2015, which was mainly attributed to an increase in orders from North America of NT$43,368 million, or an 8% year-over-year increase, from Asia Pacific of NT$40,664 million, or a 41% year-over-year increase, and from China of NT$17,367 million, or a 26% year-over-year increase.

We provide worldwide customer support. Our office in Hsinchu and wholly-owned subsidiaries in the United States, Canada, Japan, Mainland China, the Netherlands and South Korea are dedicated to serving our customers worldwide. Foundry services, which are both technologically and logistically intensive, involve frequent andin-depth interaction with customers. We believe that the most effective means of providing foundry services is by developing direct and close relationships with our customers. Our customer service and technical support managers work closely with the sales force to offer integrated services to customers. To facilitate customer interaction and information access on a real-time basis, a suite ofweb-based applications have also been offered to provide more active interactions with customers in design, engineering and logistics.

Commitments by Customers. Because of the fast-changing technology and functionality in semiconductor design, foundry customers generally do not place purchase orders far in advance to manufacture a particular type of product. However, we would engage in discussions with customers regarding their expected manufacturing requirements in advance of the placement of purchase orders.

Some of our customers have entered into arrangements with us to ensure that they have access to specified capacity. These arrangements are primarilymostly in the form of deposit agreements;agreements, and advanced cash deposits are made by customers for specified capacity at our fabs. Deposits are generally refunded when the terms and conditions set forth in the deposit agreementagreements are satisfied and shipments have been made. As of December 31, 2015,2017, we held approximately US$838450 million onof deposit from customers to reserve future capacity. See note 22 to our consolidated financial statements for further information.

The Semiconductor Fabrication Process

In general, the semiconductor manufacturing process begins with a thin silicon wafer on which an array of semiconductor devices is fabricated. The following processes cover assembly, packaging, and testing of the semiconductor devices. Our focus is on wafer fabrication although we also provide all other services either directly or through outsourcing arrangements.

Our Foundry Services

Range of Services. Because of our ability to provide a full array of services, we are able to accommodate customers with a variety of needs at every stage of the overall foundry process. The flexibility in input stages allows us to cater to a variety of customers with differentin-house capabilities and thus to service a wider class of customers as compared to a foundry that cannot offer design or mask making services, for example.

Fabrication Processes. We manufacture semiconductors using the complementary metal oxide silicon (“CMOS”)CMOS and the bipolar complementary metal oxide silicon (“BiCMOS”, which uses CMOS transistors in conjunction with bipolar junction transistor)BiCMOS processes. The CMOS process is currently the dominant semiconductor manufacturing process. The BiCMOS process combines the high speed of the bipolar circuitry and the low power consumption and high density of the CMOS circuitry. We use the CMOS process to manufacture logic semiconductors, mixed-signal/radio frequency (“RF”) semiconductors, which combine analog and digital circuitry in a single semiconductor, micro-electro-mechanical-system (“MEMS”), which combines micrometer featured mechanical parts, analog and digital circuitry in a single semiconductor, and embedded memory semiconductors, which combine logic and memory in a single semiconductor. The BiCMOS process is used to makehigh-end mixed-signal and other types of semiconductors.

Types of Semiconductors We Manufacture. We manufacture different types of semiconductors with different specific functions by changing the number and the combinations of conducting, insulating and semiconducting layers and by defining different patterns in which such layers are applied on the wafer. At any given point in time, there are thousands of different products in various stages of fabrication at our fabs. We believe that the keys to maintaining high production quality and utilization rates are our effective management and control of the manufacturing process technologies which comes from our extensive experience as the longest existing dedicated foundry and our dedication to quality control and process improvements.

Our semiconductors are used for a variety of different applications. The following is a general, non-exhaustive description of the key types of semiconductors that we currently manufacture. Depending on future market conditions, we may provide other services or manufacture other types of products that may be additive to or differ significantly from the following:principle applications include: communication, computer, consumer, and industrial/standard applications.

Logic Semiconductors.Communication. Logic semiconductors process digital data to control the operation of electronic systems. The largest segment of the logic market, standard logic devices, includes mobile computing chips, application processors, microcontrollers, digital signal processors (DSP), graphic chips and chipsets.

Mixed-Signal/RF Semiconductors. Analog/digital semiconductors combine analog and digital devices on a single semiconductor to process both analog and digital data. We make mixed-signal/RF semiconductors using both the CMOS and BiCMOS processes. We currently offer CMOS mixed-signal process down to the 28-nanometer technologySemiconductors for manufacturing mixed-signal/RF semiconductors. The primary uses of mixed-signal/RF semiconductors are in hard disk drives, wireless communications equipment and network communications equipment, with those made with the BiCMOS process occupying the higher end of the mixed-signal/RF market.

CMOS Image Sensor Semiconductors. Image sensorscommunication applications are primarily used in camera phonesmobile devices (including smartphone), wireless infrastructure and tablets. We are currently the leading foundry for the production of CMOSwireline infrastructure. Communication semiconductor products include, among others, baseband processor, application processor, radio-frequency IC, image sensors, characterized by technology features including low dark current, high sensitivity,sensor, small pixel sizepanel driver, fingerprint sensor, connectivity IC, network processor and high dynamic range achieved through integration with mixed mode processes.ethernet switch.

High Voltage Semiconductors.Computer. We currently offerSemiconductors for computer applications are mainly used in personal computers and servers. Computer semiconductor products include, among others, central processing unit (CPU), graphic processing unit (GPU), hard disk drive controller and application specific integrated circuits (“ASICs”) for machine learning, blockchain, and cryptocurrency mining.

Consumer.Semiconductors for consumer applications are used in various consumer electronics, such as digital televisions,set-top-box, digital cameras and game consoles. Consumer semiconductor products include, among others, application specific standard product (ASSP) for digital televisions,set-top-box, digital cameras, and game consoles.

Industrial/standard.Semiconductors for industrial/standard applications are used in a wide range of high-voltage processes including high voltage CMOS (“HVCMOS”)end systems. Industrial/standard semiconductor products include, among others, micro controller unit (MCU), bipolar-CMOS-DMOS (Diffusion Metal Oxide Semiconductor) (“BCD”)power management IC, data converter, programmable logic device (PLD) and ultra-high voltage technology (“UHV”), ranging from 5V to 800V, which are suitable for various panel-size display driver and power supply applications.flash controller.

The following table below presents a breakdown of our net revenue during the last three years by each semiconductorapplication type:

In terms of the products made for different applications, the increase in our net revenue from 2016 to 2017 mainly came from products for industrial/standard applications of NT$29,768 million, or a 15% year-over-year increase, and from products for computer applications of NT$19,148 million, or a 26% year-over-year increase, primarily driven by cryptocurrency mining. The increase in our net revenue from 2015 to 2016 mainly came from products for communication applications of NT$75,244 million, or a 15% year-over-year increase, and from products for consumer applications of NT$20,451 million, or a 30% year-over-year increase.

Design and Technology Platforms. Modern integrated circuit designers need sophisticated design infrastructure to optimize productivity and cycle time. Such infrastructure includes design flow for electronic design automation (“EDA”), silicon proven building blocks such as libraries and intellectual properties, simulation and verification design kits such as process design kit (“PDK”) and technology files. All of this infrastructure is built on top of the technology foundation, and each technology needs its own design infrastructure to be usable for designers. This is the concept of our technology platforms.

For years, we and our alliance partners have spent considerable effort, time and resources to build our technology platforms. We unveiled an Open Innovation Platform^® (“OIP”) initiative in 2008 to further enhance our technologies offerings. More OIP deliverables were introduced over the years, as well as in 2015.2017. In the design methodology area, we announced the release of 10-nanometer Fin Field-Effect Transistor7-nanometer FinFET,12-nanometer FinFET (“FinFET”) (“10FF”12FF”) reference flowflows for both full-chip and intellectual property design.design, as well as3-Dimensional Integrated Circuit (“3DIC”) design enablement platform solutions.

Multi-project Wafers Program (“CyberShuttle”CyberShuttle^®”). To help our customers reduce costs, we offer a dedicated multi-project wafer processing service that allows us to provide multiple customers with circuits produced with the same mask. This program reduces mask costs by a very significant amount, resulting in acceleratedtime-to-market for our customers. We have extended this program to all of our customers and library and intellectual property partners using our broad selection of process technologies, ranging from the latest 10-7-,12-,16-,22-,28-,40-,45-, 55-, 16-, 28-, 40-, 45-, 55-65- and 65-nanometer90-nanometer processes to 0.13-,0.18-, 0.25-, 0.35-,0.25-,0.35- and0.5-micron. This extension offers a routinely scheduled multi-project wafer run to customers on a shared-cost basis for prototyping and verification.

We developed our multi-project wafer program in response to the currentsystem-on-chip development methodologies, which often require the independent development, prototyping and validation of several intellectual properties before they can be integrated onto a single device. By sharing mask costs among our customers to the extent permissible, thesystem-on-chip supplier can enjoy reduced prototyping costs and greater confidence that the design will be successful.

Customer Service

We believe that our dedication to customer service has been an indispensable factor in attracting new customers, helping to ensure the satisfaction of existing customers, and building a mutually beneficial relationship with our customers. The key elements are our:

We also conduct an annual customer satisfaction survey to assess customer satisfaction and to ensure that their needs are adequately understood and addressed. Continuous improvement plans based upon customer feedback are an integral part of this business process. We use data derived from the survey as a key indicator of our corporate performance as well as a base to identify future focus areas. We believe that satisfaction leads to better customer relationships, which would result in more business opportunities.

Research and Development

The semiconductor industry is characterized by rapid changes in technology, frequently resulting in the introduction of new technologies to meet customers’ demands and in the obsolescence of recently introduced technology and products. We believe that, in order to stay technologically ahead of our competitors and to maintain our market position in the foundry segment of the semiconductor industry, we need to maintain our position as a technology leader not only in the foundry segment but in the semiconductor industry in general. We spent NT$47,95265,545 million, NT$56,82971,208 million, and NT$65,54580,733 million (US$1,9992,724 million) in 2013, 20142015, 2016 and 2015,2017, respectively, on research and development, which represented 8.0%7.8%, 7.4%7.5% and 7.8%8.2% of our net revenue, respectively. We plan to continue to invest significant amounts on research and development in 2016,2018, with the goal of maintaining a leading position in the development of advanced process technologies. Our research and development efforts have allowed us to provide our customers access to certain advanced process technologies, such as 28-nanometer, 20-nanometer28-, 20-, 16- and 16-nanometer10-nanometer technology for volume production, prior to the implementation of those advanced process technologies by many integrated device manufacturers and our competitors. In addition, we expect to advance our process technologies further down to 10/7-nanometer7- and 5-nanometer and below in the coming years to maintain our technology leadership. We will also continue to invest in research and development for our mature technologies offerings to provide function-rich process capabilities to our customers. Our research and development efforts are divided into centralized research and development activities and research and development activities undertaken by each of our fabs. Our centralized research and development activities are principally directed toward developing new logic,system-on-chip (“SOC”), derivatives andpackage/system-in-package (“SIP”) technologies, and cost-effective 3D wafer level system integration solutions, including IntegratedFan-Out (“InFO”) andChip-on-Wafer-on-Substrate (“CoWoS”CoWoS^®”) technologies.Fab-related research and development activities mostly focus on upgrading the manufacturing process technologies.

In continuing to advance our process technologies, we intend to rely primarily on our internal engineering capability andknow-how and our research and development efforts, including collaboration with our customers, equipment vendors and research and development consortia.

We also continuously createin-house inventions andknow-how. Since our inception, we have applied for and have been issued a substantial number of patents in the United States and other patents,countries, the majority of which are semiconductor-related.

Competition

We compete internationally and domestically with foundry service providers, as well as with a number of integrated device manufacturers. We compete primarily on process technologies, manufacturing excellence, customer trust and service quality, such as earlier technology readiness, better quality, faster yield improvement and shorter cycle time. The level of competition varies with the process technologies involved. For example, in more mature technologies, competitors tend to be numerous with specialized application offered. Some companies compete with us in selected geographic regions or niche application markets. In recent years, substantial investments have been made by others to establish new foundry capacities worldwide, or to transform certain manufacturing operations of integrated device manufacturers into foundry capacities.

Equipment

The quality and technology of the equipment used in the semiconductor manufacturing process are important in that they effectively define the limits of our process technologies. Advances in process technologies cannot be brought about without commensurate advances in equipment technology. To accelerate the development of next-generation lithographic technology, in August 2012 TSMC joined the CustomerCo-Investment Program of ASML Holding N.V. Customer Co-Investment Program. The program’s scope includes(“ASML”) in August 2012. As part of this program, TSMC and ASML signed a research and development of extreme ultraviolet (EUV) lithography technology and 450mm lithography tools. Under thefunding agreement with ASML,whereby TSMC made an investment of EUR838 million to acquire 5% of ASML’s equity, which had all been disposed as of October 8, 2015, and has committedprovided EUR276 million to be spread over five years, to ASML’s research and development program.programs from 2013 to 2017.

The principal pieces of equipment used by us to manufacture semiconductors are scanners, cleaners and track equipment, inspection equipment, etchers, furnaces, wet stations, strippers, implanters, sputterers, chemical vapor deposition (CVD) equipment, chemical mechanism polish (CMP) equipment, testers and probers. Other than certain equipment under leases located at testing areas, we own all of the equipment used at our fabs.

In implementing our capacity management and technology advancement plans, we expect to make significant purchases of equipment required for semiconductor manufacturing. Some of the equipment is available from a limited number of vendors and/or is manufactured in relatively limited quantities, and certain equipment has only recently been developed. We believe that our relationships with our equipment suppliers are good and that we have enjoyed the advantages of being a major purchaser of semiconductor fabrication equipment. We work closely with manufacturers to provide equipment customized to our needs for certain advanced technologies.

Raw Materials

Our manufacturing processes use many raw materials, primarily silicon wafers, chemicals, gases and various types of precious metals. Raw materials costs constituted 12.5%10.5%, 13.2%10.6% and 10.5%12.0% of our net revenue in 2013, 20142015, 2016 and 2015,2017, respectively. Although most of our raw materials are available from multiple suppliers, some materials are purchased through sole-sourced vendors. Our raw material procurement policy is to select only those vendors who have demonstrated quality control and reliability on delivery time and to maintain multiple sources for each raw material whenever possible so that a quality or delivery problem with any one vendor will not adversely affect our operations. The quality and delivery performance of each vendor is evaluated quarterly and quantity allocations are adjusted for subsequent periods based on the evaluation.

The most important raw material used in our production is silicon wafers, which is the basic raw material from which integrated circuits are made. The principal suppliers for our wafers are Formosa SUMCO Technology Corporation of Taiwan, GlobalWafers of Taiwan, Shin-Etsu Handotai of Japan, Siltronic AG of Germany, and SUMCO Corporation of Japan, and SunEdison Semiconductor Ltd. of the United States.Japan. Together they supplied approximately 93.3%95.5%, 94.3%94.7% and 95.5%92.9% of our total wafer needs in 2013, 20142015, 2016 and 2015,2017, respectively. The recent increase in silicon wafer prices due to increased demand for such wafers across the industry had a negative impact on our gross margin in 2017 and the trend is expected to continue in 2018. We have in the past obtained, and believe we will continue to be able to obtain, a sufficient supply of wafers. Please see “Item 3. Key Information—Risk Factors—Risks Relating to Our Business” for a discussion of the risk related to raw materials. In order to secure a reliable and flexible supply of high quality wafers, we have entered into long-term agreements and intend to continue to develop strategic relationships with major wafer vendors to cover our anticipated wafer needs for future years. Also, we actively address supply chain issues and bring together fab operations, materials management, quality system and risk management teams to mitigate potential supply chain risks and enhance supply chain agility. This taskforce works with our primary suppliers to review their business continuity plans, qualify their dual-plant materials, prepare safety inventories, improve the quality of their products and manage the supply chain risk of their suppliers. Please see “Item 3. Key Information – Risk Factors – Risks Relating to Our Business” for a discussion of the risk related to raw materials.

Competition

We compete internationallyEnvironmental and domestically with foundry service providers, as well as with integrated device manufacturers that devote a significant or exclusive portion of their manufacturing capacity to foundry operations. We compete primarily on process technologies, manufacturing excellence, customer trustClimate Related Laws and service quality, such as earlier technology readiness, better quality, faster yield improvement and shorter cycle time. The level of competition varies with the process technologies involved. For example, in more mature technologies, competitors tend to be numerous with specialized application offered. Some companies compete with us in selected geographic regions or niche application markets. In recent years, substantial investments have been made by others to establish new foundry capacities worldwide, or to transform certain manufacturing operations of integrated device manufacturers into foundry capacities to compete with us.

Environmental Regulations

The semiconductor production process generates gaseous chemical wastes, greenhouse gases (GHG), liquid wastes, wastewater and other industrial wastes in various stages of the manufacturing process. We have installed in our fabs various types of pollution control equipment for the treatment of gaseous and liquid chemical wastes and wastewater, equipment for GHG emission reduction and equipment for the recycling of used chemicals and treated water. Operations at our fabs are subject to regulationregulations and periodic monitoring by the R.O.C. Environmental Protection Administration, the U.S. Environmental Protection Agency and the State Environmental Protection Administration of mainland China, and local environmental protection authorities in Taiwan, the U.S. and mainland China.

We have adopted pollution control and GHG emission reduction measures to ensure compliance with environmental protection and climate related standards consistent with the practice of the semiconductor industry in Taiwan, the U.S. and mainland China. We conduct environmental audits at least once annually to ensure that we are in compliance in all material respects with and we believe that we are in compliance in all material respects with, applicable environmental and climate related laws and regulations. An environmental, safety and health (“ESH”) team operates at the corporate level that is responsible for policy establishment and enforcement, coordination with ESH teams located at each manufacturing facility and for coordination and interaction with government agencies worldwide.

Electricity and Water

We use electricity supplied by the Taiwan Power Company in our manufacturing process in Taiwan. We have occasionally suffered power outages or surges caused by difficulties encountered by the Taiwan Power Company, which have led to interruptions in our production schedule. The semiconductor manufacturing process uses extensive amounts of electricity and fresh water. Due to changes in the energy policy of the government, the growth of manufacturers in the Hsinchu Science Park, Southern Taiwan Science Park and Central Taiwan Science Park, and the droughts that Taiwan experiences from time to time, there is concern regarding future availability of sufficient electricity and fresh water and the potential impact that insufficient electricity and water supplies may have on our semiconductor production. To help address these potential shortages, we have adopted various natural resources conservation methodologies. Please see “Item 3. Key Information – Risk Factors – Risks Relating to Our Business” for a discussion of the risk related to shortage in electricity and water.

Risk Management

We employ an enterprise risk management system to integrate the prevention and control of risk. We have also prepared emergency response, crisis management and business continuity plans to respond to natural disasters and other disruptive events such as cyber attacks that could interrupt the operation of our business. These plans have been developed in order to prevent or minimizereduce the loss of personnel or damage to our facilities, equipment and machinery caused by natural disasters and other disruptive events. We also maintain insurance with respect to our facilities, equipment and inventories. The insurance for the fabs and their equipment covers, subject to some limitations, various risks, including fire, typhoons, earthquakes and other risks generally up to the respective policy limitslimit for their replacement values and lost profits due to business interruption. In addition, we have insurance policies covering losses with respect to the construction of all our fabs. Equipment and inventories in transit are also insured. No assurance can be given, however, that insurance will fully cover any losses and our emergency response plans will be effective in preventing or minimizingreducing losses in the future.

For further information, please see detailed risk factors related to the impact of climate change regulations and international accords, and business trendsnatural disasters on our operations in “Item 3. Key Information—Information – Risk Factors—Factors – Risks Relating to Our Business”.

Our Subsidiaries and Affiliates

Vanguard International Semiconductor Corporation (“VIS”). In 1994, we, the R.O.C. Ministry of Economic Affairs and other investors established VIS, then an integrated dynamic random access memory (“DRAM”) manufacturer. VIS commenced volume commercial production in 1995 and listed its shares on the R.O.C.Over-the-Counter (Taipei Exchange) in March 1998. In 2004, VIS completely terminated its DRAM production and became a dedicated foundry company. On April 14, 2014 and June 12, 2015, we sold 82 million and 82 million common shares of VIS, respectively. Subsequent to the above transactions and asAs of February 29, 2016,28, 2018, we owned approximately 28.3% of the equity interest in VIS. Please see “Item 7. Major Shareholders and Related Party Transactions” for a further discussion.

WaferTech in the United States.WaferTech. In 1996, we entered into a joint venture called WaferTech (of which the manufacturing entity is Fab 11) with several U.S.-based investors to construct and operate a US$1.2 billion foundry in the United States. Initial trial production at WaferTech commenced in July 1998 and commercial production commenced in October 1998. As of February 29, 2016,28, 2018, we owned 100% of the equity interest in WaferTech.

Systems on Silicon Manufacturing Company Pte. Ltd. (“SSMC”). In March 1999, we entered into an agreement with Koninklijke Philips NV (“Philips”) and EDB Investment Pte. Ltd. to found a joint venture, SSMC, and build a fab in Singapore. The SSMC fab commenced production in December 2000. As of February 29, 2016,28, 2018, we owned approximately 38.8% of the equity interest in SSMC. Please see “Item 7. Major Shareholders and Related Party Transactions” for a further discussion.

Global Unichip Corporation (“GUC”). In January 2003, we acquired a 52.0% equity interest in GUC, aSystem-on-Chip (SoC) design service company that provides large scale SoC implementation services. GUC has been listed on Taiwan Stock Exchange since November 3, 2006. As of February 29, 2016,28, 2018, we owned approximately 34.8% of the equity interest in GUC. Please see “Item 7. Major Shareholders and Related Party Transactions” for a further discussion.

TSMC China. In August 2003, we established TSMC China (of which the manufacturing entity is Fab 10), a wholly-owned subsidiary primarily engaged in the manufacturingmanufacture and sellingsale of integrated circuits. TSMC China commenced production in late 2004.

VisEra Technologies Company, Ltd. (“VisEra”VisEra Technologies”). In October 2003, we and OmniVision Technologies Inc. (“OVT”), entered into a shareholders’an agreement to form VisEra Technologies, Company, Ltd., a joint venture in Taiwan, for the purpose of providingback-end manufacturing service. On November 20, 2015, we obtained an additional 42.7% beneficial equity interest in VisEra Technologies from OmniVision Technologies Inc. (“OVT”)OVT when OVT was acquired by a Chinese consortium. As of February 29, 2016,28, 2018, we owned approximately 85.5%86.9% of the equity interest in VisEra.VisEra Technologies.

Xintec, Inc. (“Xintec”).In January 2007, we acquired a 51.2% equity interest in Xintec, a supplier of wafer level packaging service, to support our CMOS image sensor manufacturing business. Since June 2013, we no longer consolidated Xintec in our financial statements as the number of our appointed directors on Xintec’s board consistedcomprised less than a majority. OnIn March 30, 2015, Xintec listed its shares on the R.O.C.Over-the-Counter (Taipei Exchange). Subsequent to Xintec’s IPO, our shareholding in Xintec was diluted to approximately 41.2%. On November 20, 2015, we obtained additional 10.2% beneficial equity interest in Xintec from OmniVision Technologies Inc. (“OVT”) when OVT was acquired by a Chinese consortium, and subsequently sold 5.1%As of the equity interest in Xintec each on November 30, 2015 and April 11, 2016, respectively. Following the above transactions,February 28, 2018, we owned approximately 41.1%40.9% of the equity interest in Xintec. Please see “Item 7. Major Shareholders and Related Party Transactions” for a further discussion.

Motech Industries, Inc. (“Motech”). In February 2010, we acquired a 20.0% equity interest in Motech, a Taiwan solar cell manufacturer. Motech has been a publicly traded company on the R.O.C. Over-the-Counter (Taipei Exchange) since May 2003. On June 1, 2015, Motech and Topcell Solar International Co., Ltd merged, with Motech being the surviving entity and our equity interest in Motech was diluted to approximately 18.0%. On November 30, 2015, we sold around 29 million common shares of Motech. Subsequent to the above transaction and as of February 29, 2016, we owned approximately 12.0% of the equity interest in Motech.

TSMC Solar Ltd. (“TSMC Solar”).Nanjing. In May 2016, we established TSMC SolarNanjing (of which the manufacturing entity is Fab 16), a wholly-owned subsidiary that will primarily engagedengage in research, development, design,the manufacture and salessale of integrated circuits, to help us meet the strong demands for advanced technologies from the China market and products related to renewable energy and energy saving. As we believed that its solarfurther increase our access to business was no longer economically sustainable,opportunities in China. TSMC Solar ceased its manufacturing operationNanjing is scheduled to commence mass production in August 2015. On December 14, 2015, TSMC Solar was merged into us.May 2018.

None.

Overview

We manufacture a variety of semiconductors based on designs provided by our customers. Our business model is commonly called a “dedicated semiconductor foundry.” The foundry segment of the semiconductor industry as a whole experienced rapid growth over the last 29 years since our inception. As the leader of the foundry segment, of the semiconductor industry, our net revenue and net income attributable to shareholders of the parent were NT$597,024 million and NT$183,978 million in 2013, NT$762,806 million and NT$254,302 million in 2014 and NT$843,497 million (US$25,724 million) and NT$302,851 million in 2015, NT$947,938 million and NT$331,714 million in 2016, and NT$977,447 million (US$9,23632,977 million) and NT$344,998 million (US$11,640 million) in 2015,2017, respectively. Our net revenue in 20142016 increased by 27.8% from 2013,12.4% compared to 2015, mainly attributed to strong demand for16-nanometer products, and NT dollar depreciation. Our net revenue in 2017 increased by 3.1% compared to 2016, mainly due to the introduction of the 20-nanometer10-nanometer products, andthe continuing strong demand for 28-nanometer products. Our net revenue in 2015 increased by 10.6% from 2014, mainly due to the introduction of the 16-nanometer products, continuing strong demand for 20-nanometer products, andpartially offset by NT dollar depreciation.appreciation.

The principal source of our revenue is wafer fabrication, which accounted for approximately 95%89% of our net revenue in 2015.2017. The rest of our net revenue was majorlymainly derived from packaging and testing services, mask making, design, and royalty income. Starting in 2017, revenue from packaging and testing services is reclassified from wafer revenue tonon-wafer revenue. Therefore, ournon-wafer revenue increased to over 10% of our net revenue in 2017. Factors that significantly impact our revenue include:

Though equally important, four ofWhile the above factors are discussedsignificant factors, four of which are elaborated as follows:

Pricing. We establish pricing levels for specific periods of time with our customers, some of which are subject to adjustment during the course of that period to take into account market developments and other factors. We believe that customers find value in our large capacity, flexible manufacturing capabilities, focus on customer service and timely delivery of high yield products, have contributedand this value is reflected in our pricing. Our pricing enables us to continue to invest significantly in research and development to deliver ever-improving products to our ability to obtain premium pricing for our wafer products.customers.

Production Capacity. We currently own and operate our semiconductor manufacturing facilities. The aggregate production capacity had been expanded from approximately 79 million 300mm12-inch equivalent wafers in 2013,2015, to approximately 810 million in 20142016 and approximately 911 million in 2015.2017.

Technology Migration.

Our operations utilizeoperation utilizes a variety of process technologies, ranging from mature process technologies of 0.50.25 micron or above circuit resolutions to advanced process technologies of 16/20-nanometer10-nanometer circuit resolutions. The table below presents a breakdown of wafer revenue by circuit resolution during the last three years:

In 2017, the 10-nanometer revenue reached 10% of total wafer revenue. The combined 16/20-nanometer revenue represented 25% of total wafer revenue. Advanced technologies accounted for 58% of total wafer revenue, up from 54% in 2016.

In 2016, the combined 16/20-nanometer revenue represented 28% of total wafer revenue, up from 20% in 2015. Advanced technologies accounted for 54% of total wafer revenue, up from 48% in 2015.

Foreign Currency Exchange Rate.More than 90% of our sales are denominated in USU.S. dollars while we publish our financial statements in NT dollars. As a result, fluctuations in exchange rates of NT dollar against USU.S. dollar couldwould have a significant impact on our reported revenue. Continuous NT dollar depreciation from 20132015 to 20152016 had a favorable effect on our revenue, with weighted average exchange rates of NT dollar per USU.S. dollar depreciating from NT$29.69 in 2013 to NT$30.30 in 2014 and further to NT$31.70 in 2015.2015 to NT$32.21 in 2016. On the other hand, the NT dollar appreciation from 2016 to 2017 had an unfavorable effect on our revenue, with weighted average exchange rates of NT dollar per U.S. dollar appreciating from NT$32.21 in 2016 to NT$30.45 in 2017.

First-Time Adoption of IFRSs

On May 14, 2009, the R.O.C. FSC announced that all companies with shares listed on TWSE, including us, were required to prepare consolidated financial statements in accordance with the IFRSs adopted for use in Taiwan (“Taiwan-IFRSs”) starting January 1, 2013, with a transition date of January 1, 2012. We have prepared and reported our consolidated financial statements under Taiwan-IFRSs and published such financial statements as required under the applicable regulations and listing rules of the TWSE since first quarter of 2013. Prior to 2013, we prepared and reported our consolidated financial statements in accordance with R.O.C. GAAP.

In addition, for our continuing US SEC reporting obligations, we are required to report our financial statements under IFRSs as issued by the IASB. Therefore, the consolidated financial statements included herein have been prepared in accordance with IFRSs as issued by the IASB. See note 42 to our 2013 consolidated financial statements not included herein for the explanation of how the transition from R.O.C. GAAP to IFRSs has affected the reported financial position, financial performance, and cash flows.

Critical Accounting Policies Andand Judgments

Summarized below are our accounting policies that we believe are important to the portrayal of our financial results and also involve the need for management to make estimates about the effect of matters that are uncertain in nature. Actual results may differ from these estimates, judgments and assumptions. Certain accounting policies are particularly critical because of their significance to our reported financial results and the possibility that future events may differ significantly from the conditions and assumptions underlying the estimates used and judgments made by our managementus in preparing our financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes, which are included in this annual report.

Revenue Recognition. We recognize revenue from the sale of goods when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

We record a provision for estimated future returns and other allowances in the same period the related revenue is recorded. Provision for estimated sales returns and other allowances is generally made at a specific percentageand adjusted based on historical experience and adjusted based on management judgment,the consideration of varying contractual terms, and any known factors that would significantly affect the returns and allowances, and our managementwe periodically reviewsreview the adequacy of the percentageestimation used. However, because of the inherent nature of estimates, actual returns and allowances could be different from our estimates. If the actual returns are greater than our estimated amount, we could be required to record an additional provision, which would have a negative impact on our recorded revenue and gross margin.

The provisions recorded as For further information, please refer to note 19 to the deduction of revenue were NT$6,633 million, NT$10,506 million and NT$17,723 million (US$541 million), respectively, representing 1.1%, 1.4% and 2.1% of our gross revenue for the years ended December 31, 2013, 2014 and 2015. The higher percentage of provision in 2015 was mainly related to business terms with customers.

Allowance for Doubtful Accounts. We assess the allowance for doubtful accounts by examining our historical collection experience and current trends in the credit quality of our customers as well as our internal credit policies. We also evaluate indication of losses of accounts receivable based on an individual and collective basis at the end of each reporting period. We recognized additional allowance when objective evidence indicates that the estimated future cash flow of accounts receivable decreases as a result of one or more events that occurred after the initial recognition of the accounts receivable.

Changes in the carrying amount of the allowance account are recognized as bad debt expense which is recorded in the operating expenses - general and administrative. When accounts receivable are considered uncollectable, the amount is written off against the allowance account.

As of December 31, 2014 and 2015, the allowances set aside for doubtful receivables were NT$487 million and NT$488 million (US$15 million), respectively, representing 0.4% and 0.6% of our gross notes and accounts receivables as of those dates.consolidated financial statements.

Inventory Valuation.Inventories are stated at the lower of cost or net realizable value for finished goods,work-in-progress, raw materials, supplies and spare parts. Inventory write-downs are made on anitem-by-item basis, except where it may be appropriate to group similar or related items.

A significant amount of our manufacturing costs areis fixed because our extensive manufacturing facilities (which provide us such large production capacity) require substantial investment to construct and are largely fixed-cost assets once they become operational. When the capacity utilization increases, the fixed manufacturing costs are spread over a larger amount of output, which would lower the inventory cost per unit thereby improving our gross margin.

We evaluate our ending inventory based on standard cost under normal capacity utilization, and reduce the carrying value of our inventory when the actual capacity utilization is higher than normal capacity utilization. No adjustment is made to the carrying value of inventory when the actual capacity utilization is at or lower than normal capacity utilization. Normal capacity utilization is established based on historic loadings compared to total available capacity in our wafer manufacturing fabs.

Due to rapid technology changes, we also evaluate our ending inventory and reduce the carrying value of inventory for estimated obsolescence and unmarketable inventory by an amount that is the difference between the cost of the inventory and the net realizable value. The net realizable value of the inventory is mainly determined based on assumptions of future demand within a specific time horizon, which is generally 180 days or less.

Realization of Deferred Income Tax Assets.When we have net operating loss carry forwards, investment tax credits or temporary differences in the amount of tax recorded for tax purposes and accounting purposes, we may be able to reduce the amount of tax that we would otherwise be required to pay in future periods. We generally recognize deferred tax assets to the extent that it is probable that sufficient taxable benefitsincome will be available in the future to utilize.utilize such assets. The income tax benefit or expense is recorded when there is a net change in our total deferred tax assets and liabilities in a period. The ultimate realization of the deferred tax assets depends upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible or the investment tax credits may be utilized. Specifically, our realization of deferred income tax assets is impacted by our expected future revenue growth and profitability, tax holidays, Alternative Minimum Tax (“AMT”), 10% taxthe surtax imposed on unappropriated earnings and the amount of tax credits that can be utilized within the statutory period. In determining the amount of deferred tax assets as of December 31, 2015,2017, we considered past performance, the general outlook of the semiconductor industry, business conditions, future taxable income and prudent and feasible tax planning strategies.

Because the determination of the amount of realization of the deferred tax assets is based, in part, on our forecast of future profitability, it is inherently uncertain and subjective. Changes in market conditions and our assumptions may cause the actual future profitability to differ materially from our current expectation, which may require us to increase or decrease the realization of the deferred tax assets that we have recorded. As of December 31, 20142016 and 2015,2017, the deferred tax assets were NT$5,1398,271 million and NT$6,38512,106 million (US$195408 million), respectively. The deferred tax assets increased by NT$1,2463,835 million in 2015,2017, mainly due to depreciation of certain fixed assets that resulted in temporary differences between the carrying value of these fixed assets and their tax basis, which differences may be deductible for tax purposes in the future.

Impairment of Tangible and Intangible Assets other than Goodwill. We assess the impairment of tangible and intangible assets other than goodwill whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. Our tangible and intangible assets other than goodwill subject to this evaluation include property, plant and equipment and amortizable intangible assets.

Indicators we consider important which could trigger an impairment review include, but are not limited to, the following:

When we determine that the carrying value of tangible and intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment for tangible and intangible assets based on a projected future cash flow. If the tangible or intangible assets are determined to be impaired, we recognize an impairment loss through a charge to our operating results to the extent the recoverable amount, measured at the present value of discounted cash flows attributable to the assets, is less than their carrying value. Such cash flow analysis includes assumptions about expected future economic and market conditions, the applicable discount rate, and the future revenue generation from the use or disposition of the assets. We also perform a periodic review to identify assets that are no longer used and are not expected to be used in future periods and record an impairment charge to the extent that the carrying amount of the tangible and intangible assets exceeds the recoverable amount. If the recoverable amount subsequently increases, the impairment loss previously recognized will be reversed to the extent of the increase in the recoverable amount, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

The process of evaluating the potential impairment of tangible and intangible assets other than goodwill requires significant judgment. We are required to review for impairment groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we must make subjective judgment in determining the independent cash flows that can be related to specific asset groups. In addition, because we must make subjective judgment regarding the remaining useful lives of assets and the expected future revenue and expenses associated with the assets, changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges in future periods. Our projection for future cash flow is generally lower during periods of reduced earnings. As a result, an impairment charge is more likely to occur during a period when our operating results are already otherwise depressed.