Taiwan is by no means a novel issue in international relations, with a history of cross-strait crises coloring the latter half of the 20th century. However, tensions over Taiwan have been markedly subdued in the past two decades, coinciding with China’s rapid ascendance to an integral role in the global economy under the PRC’s “hide and bide” strategy that held sway prior to Xi Jinping’s reign.
However, 25 years on from the latest military scare, there is reason to worry once again.
That worry should most certainly be shared by investors in the overall semiconductor industry.
What Didi Tells Jim Cramer About U.S.-China Relations
Cause for Concern
The latest salvo in rhetoric that could lead to an actual conflict was uttered by none other than Xi during the commemoration of the 100th anniversary of the Communist Party of China (CCP).
“Resolving the Taiwan question and realizing China’s complete reunification is a historic mission and an unshakable commitment of the Communist Party of China,” he said in a keynote speech. “We must take resolute action to utterly defeat any attempt toward ‘Taiwan independence,’ and work together to create a bright future for national rejuvenation.”
Xi stated clearly that he considers the Taiwan issue a matter of territorial integrity and sovereignty, adding that it’s an issue upon which the international community should take notice. Xi added he will “never allow any foreign force to bully, oppress, or subjugate” China on these critical issues.
As a result of these new remarks, many fear that Xi is willing to stake his legacy on “making China strong,” foremost via intervention in bringing what he sees as a rebellious province to heel.
Indicative of the heightened temperature amid the Chinese leader’s increasingly belligerent tone, NATO even moved to declare China a security risk for the very first time in recent weeks.
“China’s growing influence and international policies present challenges to alliance security,” a NATO statement read. “Leaders agreed that we need to address such challenges together as an alliance, and that we need to engage with China to defend our security interests.”
Self-Sufficiency: Paramount for the Paramount Leader
Yet, the aims of China in terms of bringing Taiwan into the fold as it did with Hong Kong aren’t solely rooted in Xi Jinping’s self-aggrandizement or purely nationalistic ends. It is also derived from a quest for self-sufficiency, especially in terms of its burgeoning tech sector.
China’s designs on self-sufficiency explicitly include a pre-eminent role in semiconductor technology. Indeed, its controversial “Made in China 2025” push includes a goal to domestically produce 70% of the chips demanded by domestic firms. Such a drastic shift seems, at the moment, far-fetched. In fact, only 6% of semiconductors used in 2020 by Chinese firms were made in China.
Additionally, China’s national champion foundry, Semiconductor Manufacturing International Corp. (SMIC), remains a laggard in terms of technological capability. The firm is as of yet unable to complete manufacture of 10 nm chips, largely due to U.S. sanctions on specialized equipment exports from firms like ASML Holdings (ASML) – Get Report. By comparison, Taiwan’s global champion, Taiwan Semiconductor (TSM) – Get Report, is already manufacturing 5 nm chips, leading the bleeding edge of technological advancement, perhaps a decade ahead of China’s best foundry.
China has recently moved to close the gap in specific sectors of semiconductor manufacturing, notably through the acquisition of NXP Semiconductor (NXPI) – Get Report spinoff Nexperia, a firm that largely manufactures chips for the automotive industry, via Chinese state-backed firm Wingtech Technologies. Nevertheless, the acquisition is rather a small measure in closing the sizable gap between China’s still-nascent semiconductor industry and its Korean and Taiwanese counterparts.
TST Recommends
This is where Taiwan becomes a lynchpin between both the political and economic strategies China has thus far communicated. For the semiconductor industry, Taiwan’s largest company, Taiwan Semiconductor, is perhaps the most systemically critical firm in the world. As the world emerges from a significant shortage, abetted by both the COVID-19 pandemic and a major drought in Taiwan, the concentration risk on TSMC as the foundry of the world has only been highlighted.
Per Trendforce, 54% of total global foundry revenue last year was captured by TSMC, with a further 6% attributed to the remainder of the island nation’s manufacturers. As such, the bulk of the semiconductor industry including stalwarts like Advanced Micro Devices (AMD) – Get Report, Qualcomm (QCOM) – Get Report and Nvidia (NVDA) – Get Report, as well as end-users like Apple (AAPL) – Get Report, rely heavily on Taiwan’s political stability.
Why Nvidia Is Jim Cramer’s Favorite Stock
Strongest Semiconductor Stocks to Buy That Aren’t Nvidia
Advanced Micro Devices, Nvidia and Apple are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells the stocks? Learn more now.
Softening the Blow?
Seemingly worried about this risk, both TSMC and western partners of Taiwan have endeavored to assuage concerns on this front.
Most notably, the Trump administration, in its waning days, fostered an agreement to establish a $12 billion foundry in Arizona. Per Reuters, this plant is also set to see significant expansion to cope with the ongoing shortage of chips, with designs on investing $100 billion over the next three years.
Additionally, the U.S. has courted key TSMC competitor Samsung with subsidies and incentives, to solid success thus far. In May, the South Korea-based firm announced investments totaling about $18 billion in an Austin, Texas-based fabrication plant set to be operational by 2024.
The reliance on international supply chains was highlighted as a weak point for the sector in the past year, especially as constant delays by U.S.-based industry leaders like Intel (INTC ) – Get Reportthat leave them behind TSMC and, to a lesser extent, Samsung. Nonetheless, reshoring may be the only viable backstop should these critical supply chains be disrupted.
Still, despite the efforts to ease the potential pain of a cross-strait conflict and global supply chains broadly for the still largely U.S.-based industry, it is clear that reshoring will take time and significant cost. A major shock to the system in Taiwan at the present moment or even the near future would likely be too great for reshoring efforts in the U.S. to contend with in any meaningful sense.
Eyes on International Affairs
In short, the military risks in the South China Sea no doubt send the greatest shivers down the collective spine of the international order. This is especially the case as Xi Jinping suggests in his speeches that the resolve and ambition of China in capturing Taiwan will not be constrained by international pushback.
However, as an ancillary impact, its economic effects could spell catastrophe for the investing public as well. Nowhere would this catastrophe be felt more firmly than the semiconductor industry, which is so uniquely reliant upon Taiwan.
As such, hyper-vigilance in terms of international affairs is absolutely advisable for investors eyeing the sector.
Kevin Curran is a research editor and project assistant on China Observers in Central and Eastern Europe and MapInfluenCE, research projects focused on China operated by the Association for International Affairs in Prague as well as a visiting fellow at the International Sustainable Finance Centre overseen by the Europeum think tank.
