What If When China Invades Taiwan…
As the world closely watches Russia’s invasion of Ukraine, monitoring reactions as tensions between China and Taiwan have been escalating.
China’s leader Xi Jinping has boldly claimed that Taiwan, a “renegade province,” would become part of China again, peacefully or by force, under a philosophy of “one country, two systems.”
The United States officially recognizes the communist-ruled People’s Republic of China in Beijing as the legal government of China. Still, it unofficially recognizes the democratic Republic of China, Taiwan, under the 1979 U.S. Taiwan Relations Act.1
The war between China invading Taiwan is less related to “one-China” rule and more about China’s quest to dominate the semiconductor industry - a huge national security threat to the United States.
Semiconductors, also known as chips, are used in most technologically advanced devices, like cell phones, cars, and weapons. It is the backbone of the technological revolution.
Why is China interested in Taiwan?
Semiconductor computer chips.2
Taiwan produces over 92% of the world’s mid-end to advanced computer chips configured for smartphones, computers, cars, and military equipment.
By comparison, China produces a little over 5% while the U.S. produces approximately 10%, according to market analysts.
U.S. and China are dependent on Taiwan corporations - TSM
Samsung Electronics in South Korea, a major player in advanced semiconductors, produces the remaining 8% of the global market.
The U.S. is the world’s leader in the research and design of semiconductors, companies subcontract their manufacturing to lower-cost nations, such as Taiwan.
Sub-contracting chip fabrication reduced market share in America from 37% in 1990 to 12% in 2021.
Apple, Qualcomm, Nvidia, Google, Amazon, and Microsoft contract either a majority or some portion of semiconductor production from TSMC and other Taiwan-based companies.
TSMC is Apple’s exclusive provider for advanced chips.
When China Invades Taiwan
When China invades Taiwan,
The United States market will drop at least 10% when China invades Taiwan.
Corporations will scramble for semiconductor chips.
Increased demand for chips (from iPhones to missiles) will impact our national security and increase manufacturing costs.
Recently, Taiwan Semiconductor Mfg. Co. Ltd. (TSM: $80) Chair Mark Liu said the below.
If China were to invade Taiwan, the most-advanced chip factory in the world would be rendered “not operable.”Nobody can control TSMC by force. If you take a military force or invasion, you will render TSMC factory not operable.Because this is such a sophisticated manufacturing facility, it depends on real-time connection with the outside world, with Europe, with Japan, with U.S., from materials to chemicals to spare parts to engineering software and diagnosis. - TSMC Chair Mark Liu said.
As an investor, one needs to take the above statement by Chairman Liu very seriously. Here is the reality.
EV Paralysis
Taiwan’s president, Tsai Ing-wen, that she saw the island’s tech prowess as a means of shoring up support for its democracy. Calling economic security a “pillar” of national security, she said Taiwan was willing to work with partners to build sustainable supply chains for what she called “democracy chips.”3
Tsai is right.
Semiconductor shortage
U.S. dependence on TSMC for advanced semiconductors is causing major disruptions in the supply chain. China’s military threats only accentuate this dynamic. Semiconductor demand exceeds global production, contributing to rising inflation. In 2021, automotive manufacturers in the U.S. produced 7.7 million fewer vehicles than the previous year because of the semiconductor shortage. Factories lay idle; cars are produced but set aside until computer chips can be installed. Wait time for ordering cars can be more than eight months. Electric vehicles, alternative energy sources, and electric grids are run on sensors requiring advanced microchips. Recently, computer demand has decreased, causing an oversupply of semiconductors in this sector.4
CHIPS Act
Analysis by the Global Semiconductor Alliance shows that semiconductors contribute $2.7 trillion directly and indirectly to global GDP. However, the vast majority of semiconductor production, including all production of advanced or “leading-edge” semiconductors, occurs overseas by a limited number of foreign producers. Semiconductors are a strategic resource, and the United States must ensure that it can produce the chips that are so critical to our economic prosperity and national defense here at home.5
To increase production and diversify away from one major supplier in advanced chip production, America must become a global leader in research and design and semiconductor manufacturing. To this end, the U.S. negotiated with TSMC to build a $12 billion fabrication plant outside Phoenix, Arizona, to be completed in 2024. In exchange, the U.S. will provide greater security guarantees to the island. While manufacturing fewer advanced chips than TMSC, Intel is also building two new fabrication plants outside Phoenix. Samsung will begin building a $17 billion fabrication plant near Austin, Texas. While this will not put the U.S. in a leadership position, it will begin to ease the shortage of chips.
The bipartisan, bicameral CHIPS for America Act included in the Bipartisan Infrastructure Act will provide more than $50 billion in incentives to accelerate and catalyze domestic leading-edge semiconductor production. While the investments made by the private sector over the past year are necessary, these investments will not be sufficient to mitigate the risks associated with the current U.S. supply chain vulnerabilities.
Call To Action
Chip shortages are
Economic risk
National security risk
There is no immediate fix. The best day to plant a tree was 20 years ago. As an investor, if you are long TSM, or investing in stocks that rely on TSM, what is your backup?
What are your portfolio strategies when China invades Taiwan?
Our global team of industry experts are guiding our clients on a regular basis who are faced with similar geopolitical investment risks in China, Africa and other East Asian countries. When you are in need for guidance, you can reach our team at info@unicusresearch.com - don’t forget to mention “geopolitical investment risks” in the subject line.
https://www.congress.gov/bill/96th-congress/house-bill/2479#:~:text=Taiwan%20Relations%20Act%20%2D%20Declares%20it,other%20people%20of%20the%20Western
https://www.commerce.gov/news/press-releases/2022/04/analysis-chips-act-and-bia-briefing
https://www.nytimes.com/2022/08/29/technology/taiwan-chips.html
https://blogs.timesofisrael.com/
https://www.commerce.gov/news/press-releases/2022/04/analysis-chips-act-and-bia-briefing