The semiconductor industry is at an interesting intersection, with U.S.-China tensions likely to force greater diversification in its manufacturing base. It will be a tremendously expensive process, with a single chip foundry costing US$10 billion or so to build.
Taiwanese President Tsai Ing-wen is defending her nation as an investment destination for those big-ticket factories. She put out a statement late Tuesday night following a meeting with the chief operations officer of the Dutch chip equipment supplier ASML Holding (ASML) , noting that companies such as ASML are still pumping money into Taiwan.
She finds a willing ear with Warren Buffett, whose Berkshire Hathaway (BRK.A) (BRK.B) disclosed this week that it recently invested US$4.1 billion in the shares of Taiwan Semiconductor Manufacturing Co. ( (TSM) and TW:2330), the world's largest contract chipmaker. Taiwan Semiconductor has several chip fabrication centers in Taiwan but also makes chips in China, the United States and Singapore.
The Taiwanese leader is responding to the suggestion that semiconductor-related companies may be forced to pick sides between the United States and China. That issue has come to a head after the administration of U.S. President Joe Biden introduced new rules preventing companies from supplying China with advanced U.S.-made chips or using U.S. technology in other locations to supply chips to China that could be used in military applications or to perpetuate human rights abuses.
It is no wonder, then, that the CEO of the Taiwanese chipset maker MediaTek (TW:2454), Rick Tsai, said over the weekend that customers are looking to ensure they have a diverse supply base for chips, partly so that they can avoid any regulatory crosscurrents that might disrupt their supply chains.
Some very large equipment manufacturers "will require their chip suppliers to have multiple sources, like from Taiwan and from U.S., or from Germany, or from Europe," Tsai, who is not related to the Taiwanese president, told Reuters in an interview. "In those cases, we will have to find multiple sources for the same chip if the business warrants that."
MediaTek designs chipsets for use in electronics such as smartphones, tablets, GPS devices, wearable devices and smart appliances. It supplies Chinese smartphone makers such as Xiaomi ( (XIACY) and HK:1810) and Oppo, thus helping MediaTek become the world's top phone chipset supplier in 2020, though it also has a wide range of international clients including Samsung Electronics (KR:005930) as well as Amazon.com (AMZN) for its Alexa device.
Spreading the Wealth
MediaTek designs chips that are made in Taiwan Semiconductor foundries, with its top-of-the-line wafers made in Taiwan. But it also uses GlobalFoundries (GFS) for chips that go into older smartphone models. It also recently struck an agreement to work with Intel (INTC) to get chips made at its fabrication facilities to go into MediaTek chipsets for smart TVs and WiFi networks. Intel should be making chips for MediaTek in Ireland by the second half of 2024.
TSM is investing US$12 billion to build a chip foundry in Arizona. It expects to hold a "tool-in" ceremony for that first factory in December to install the first production equipment, with an eye on mass production in 2024. It reportedly also plans to announce a new semiconductor plant to make cutting-edge 5-nanometer wafer chipsets at the same site north of Phoenix in the coming months, likely with another investment in the order of US$12 billion and with the two facilities essentially sitting side by side.
MediaTek plans to use the TSM operations in the United States when they are up and running. Tsai, the CEO, says companies are already expanding their production base in an "incremental" way.
That only seems wise. He's right that the new U.S. rules are forcing a distinction to be made between chips made for China as well as separate U.S.-designed or U.S.-made chips. European chips presumably fall in a pleasant in between, though it's harder to find brownfield or greenfield sites in Europe for large manufacturing operations.
The statement from President Tsai's office noted that ASML's operations chief, Frederic Schneider-Maunoury, made it clear his European company was going to continue to invest in Taiwan. It already employs 4,500 people at five factories in Taiwan.
"At this moment when the world is paying attention to and is concerned about Taiwan, I am very grateful to ASML for investing in Taiwan with concrete actions," Tsai's statement said. "I believe this has also dispelled the rumors overhyping Taiwan's risks."
The original trade war between China and the United States prompted quite a bit of reshoring for Taiwanese companies, which got tax breaks, utility subsidies and aid finding land if they pledged to build new operations back home.
But China's recent wargames around Taiwan, which simulated a blockade of the island nation, have alarmed companies with manufacturing operations in Taiwan or that depend on supply from Taiwan. Just as China's zero-Covid strictures have made clear the wisdom of a "China+1" policy of diversifying production away from China, the prospect of a suspension of supply from Taiwan suggest the chip industry find ways to reduce its reliance on production there.
Buffett's Big Bet
TSM shares are up 16% since last Thursday's close, with the last week a strong one for Asia-based tech. The Buffett bounce came on Tuesday, producing a 7.9% gain, but the stock added another 1.5% here on Wednesday. TSM shares are coming off a two-year low set in October.
Berkshire Hathaway typically has avoided tech investments, with Buffett famously saying he's uncomfortable investing in anything he doesn't understand clearly. While this has had opportunity costs, Buffett -- who typically is personally involved in approving large-stake purchases even if his portfolio managers suggest the call -- prides himself on avoiding bad investments: "Rule No. 1 is never lose money," he has said. "Rule No. 2 is never forget Rule No. 1."
He must therefore see some kind of floor in the TSM share price. With its U.S. operations in the works, the company is the living proof that the chip industry can be successful in Taiwan while diversifying away from it and China.
Standard & Poor's this week put out an interesting report, "Technology and Geopolitics: What If the Semiconductor Industry Bifurcates?" S&P concludes it will be a timely and expensive process.
I don't think there's much "If" about it. The chip industry will bifurcate. As it now stands, Silicon Valley and the U.S. industry can't easily supply China unless granted special permission or it uses a supply of older chips. China was already intent on developing a homegrown chip industry, and those efforts will be given extra impetus. Analysts say the U.S. action will set back those efforts by a decade or more.
S&P notes several risks while this occurs. There may be an oversupply of some kind of chips as companies build duplicative manufacturing bases. Other in-demand chips may dry up.
Supply chains will also need to reconfigure. There are only a handful of companies in each segment of the chip industry: software/design; equipment makers; "fabless" chipset makers that outsource production; wafer makers; foundries/factories; and integrated design manufacturers. They're concentrated in the United States, East Asia and northern Europe. Increased adversarial relations between nations could cause the supply of a section of the chain to dry up.
It will be fascinating to watch how it plays out. The US$10 billion to US$12 billion investments in new foundries will need to occur, often with a good half-decade before full supply comes online. One bottom line, however, which may have inspired Buffett's investment is that chips and semiconductors are the bedrock of our modern wired lives. Prospects are good; the industry must just figure out how to reconfigure itself.
