The semiconductor industry woes due to geopolitical issues

Seventy-five years after the transistor was invented, the world is experiencing rapid growth in computing power year on year. However, the semiconductor industry is currently at the centre of Washington-Taipei geopolitical issues due to supply chain disputes between China and the US. 

Taiwan is determined to keep as much of the industry as it can but this is not congruent with the US’s strategic goals. Washington fears that China could potentially dominate the supply chain and leave the US locked out of essential microelectronics should further military tension between the two countries arise. This, in turn, is because the global semiconductor industry is mainly led by Taiwan, which has a decisive lead in the sector thanks to companies like TSMC. 

Founded 35 years ago, TSMC has become a giant with an effective hold on the global semiconductor-chip market. However, TSMC is different from peers such as Intel and Samsung as it finds itself at the forefront of the industry. To this effect, TSMC’s has fostered a new trend of fabless chip companies like Nvidia and AMD. TSMC is attracting big customers like Google and Tesla, and has commitments with Apple, Intel, AMD, and several other buyers of their products.

Due to the sheer efficiency of their model, most chipmakers outsource fabrication to TSMC. In fact, Taiwan now accounts for 20 per cent of global wafer fabrication, making it the largest concentration in any given country. This makes up 92 per cent of capacity for the most advanced chips in production today. TSMC is also the exclusive manufacturer of chips used to make iPhones, making Apple’s production contingent on whatever happens in Taiwan. 

Meanwhile, Intel has laid out the ambitious goal of matching TSMC’s process technology by 2024 and overtaking it a year later—although the continuing drop in its share price shows Wall Street’s skepticism about Intel’s ability to fix its previous missteps and catch up with TSMC's technology advances by that time.

On a global front, the US has stepped up competition with China’s economy by introducing restrictive controls that block exports of some chip manufacturing equipment. This has had a negative impact on sales of certain semiconductors to the country. China’s threats against Taiwan have intensified over the past two years, which raises concerns about escalation that would lead to permanently cutting off or even destroying chip supplies. 

Washington seeks to reduce Beijing-sourced semiconductors and reduce its own dependency on Taiwan for chip supplies. Washington is also pushing to diversify chip manufacturing away from Taiwan as this is more relevant now that the chip shortage—triggered by disruptions during the pandemic—is becoming more of an issue for manufacturers. Other countries are making similar efforts. 

To rebuild semiconductor manufacturing capacity, a $20-billion chip fab is being built in Ohio as part of an effort to address the fact that the US share in global chip manufacturing went down from 37 per cent in 1990 to 12 per cent in 2020. Another fab built in Arizona is scheduled to start mass production in 2024. But the plants have neither the scale nor the technological level of TSMC’s newest fabs in Taiwan. In addition, Samsung’s yield problem is also causing it trouble in attracting big customers for cutting-edge chip production.

In short, competition between the US and China over the semi-conductor supply chain is both causal and related to underlying risks of military conflict over Taiwan, the country in which TSMC is based. However, TSMC is at least partly protected from such geopolitical tensions because it provides an integral product to both sides of the conflict and serves many customers globally. Undoubtedly, from an investment point of view, TSMC is trading at attractive levels and would fit in nicely in a well-diversified portfolio.

Disclaimer: This article is brought to you by Shaun Frendo, Research Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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