Taiwan’s major importance in semiconductors

The Americans are the world leaders by far in chip design and intellectual property, but they account for only 12% of global semiconductor production, while Taiwan controls 65% of the market.

Increase in geopolitical tensions

Since the beginning of the year, the Chinese Air Force has increased its incursions into Taiwan’s airspace. In recent days, a record 150 military planes have entered Taiwan’s air defense identification zone. China responds to the arrival of an English warship in the international waters of the Taiwan Strait, at the “Quad” – the Quadrilateral Security Dialogue, a strategic alliance between the US, Australia, Japan and the United States. India – and “Aukus” – a new military alliance between the US, UK and Australia.

For now, it is only intimidation, according to US military officials, even if the People’s Liberation Army could take a small Taiwanese island, Pratas Island, located in the South China Sea, 410 km from Taiwan, 320 km from Hong Kong and 490 km from the Philippines. Pratas Island would then be for China, a strategic observation tower to monitor American and Allied ships and planes coming from the Pacific Ocean. China and its diplomacy are getting aggressive; economic considerations, which had dominated for years, are giving way to a communist and more authoritarian ideology.

Our subject is not to develop the premises of a potential 3th world war, but to re-emphasize the importance of Taiwan in the production of semiconductors. An armed conflict on this island, damaging the semiconductor production sites would have a devastating effect on the world economy and on the stock markets obviously. We are currently seeing that a shortage of chips is forcing car manufacturers to reduce their production between 30% and 40%, or even stop certain production lines.

Two Asian countries in a dominant position

Taiwan accounts for 65% of world semiconductor production, of which 55% for TSMC with customers like Apple – TSMC is the exclusive supplier of microprocessors for the iPhone -, Qualcomm and Nvidia. If there was a military conflict in Asia, South Korea (Samsung) would likely be affected, a country which accounts for 20% of the world’s semiconductor production. To make it short, 85% of the world semiconductor production is based on 2 Asian countries!

According to Capital Economics, TSMC and Samsung make almost all of the most technologically advanced chips. TSMC manufactures 60% of less sophisticated chips, such as those for the automotive industry.

The US, Europe and China want to drastically reduce their dependence on Taiwan. The US is the world leader by far in chip design and intellectual property, but it accounts for only 12% of global semiconductor production, up from 37% in the 1990s. recovery, Joe Biden wants to inject $ 50 billion to revive domestic production (TSMC and Samsung have projects), while the Chinese minimum wage, which is the 5th global foundry, is strongly penalized by American sanctions (black list), no longer able to buy ASML equipment to increase its production.

Increasing production capacities is very complicated

It takes a lot of money, it takes time and the technological level is very high. Intel wants to invest $ 20 billion in the US, and more globally TSMC $ 100 billion and Samsung $ 205 billion over the next few years. To build new production sites, experts consider that it takes at least 5 years.

Military experts do not believe in a Chinese invasion of Taiwan in the near future for the sole reason that China would be heavily penalized for its own microchip needs, and the US would obviously not let this happen. Taiwan knows full well that when the US and China become independent in semiconductors, its political position will be weakened; his silicon shield for the moment protects Taiwan from a Chinese invasion; do we think! Taiwan has every interest in keeping its technology at home.

TSMC and Samsung remain the undisputed leaders in R&D, technology and strike force to build new production capacities. The current shortage of microchips will last in any case in 2022, even 2023, according to the CEO of Marvell Technology. AMD is more optimistic in anticipating a normalization at 2th semester 2022. General Motors is starting to see signs of easing. We are overweighting the semiconductor sector, favoring OEMs such as ASML, Applied Materials and LAM Research.

Heravest SA is an independent boutique in investment advice, from top-down to bottom-up, and a provider of investment solutions.

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