Tech investors are waiting to see if US House Speaker Nancy Pelosi’s historic visit to Taiwan will trigger a cascading response from China.
While the likely short-term outcome is more troubling, the potential trip serves as a reminder of the significant risk Taiwan poses to the U.S. tech sector. Most of the world’s advanced chips are made in Taiwan.
Pelosi landed in Taipei on Aug. 2, making her the first female speaker to visit Taiwan since Newt Gingrich in 1997. So far, China has reacted to the trip by banning some Taiwanese imports and conducting live-fire military exercises in around the island, which it considers a breakaway province. Some experts are concerned that the likelihood of a future invasion of Taiwan may increase.
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In assessing the situation, investors should consider the inherently unpredictable nature of geopolitics. Some things that seem improbable one day, can happen the next. Bridgewater founder Ray Dalio has said he believes there is a 30% chance of a war between the US and China in the next few years. Taiwan is the most likely trigger for hostilities, he said.
Any possibility of a war between China and the US deserves serious attention, especially since the consequences would be so dire. While the potential loss of life is the biggest concern, it’s hard to overstate Taiwan’s importance to the US and the global technology landscape.
Most of the advanced chips needed for military defense systems and corporate IT services are manufactured in Taiwan. Taiwan accounts for more than 90 percent of the world’s most advanced chip manufacturing with South Korea at 8 percent, according to a report by the Semiconductor Industry Association and the Boston Consulting Group last year.
Most of the capacity comes from Taiwan Semiconductor Manufacturing, which was established in 1987 and has pioneered the business model of manufacturing chips for external customers. It had total revenue of $57 billion last year and is the world’s largest third-party foundry, dominating the market for high-end chips, including the main processors in Apple’s iPhones, smartphone chips ligents used by Qualcomm and computer processors for advanced micro devices.
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A military conflict over Taiwan could knock all of Taiwan Semiconductor’s production offline and have disastrous effects on the entire technology supply chain for these companies.
In an interview with CNN on July 31, TSMC president Mark Liu said there would be no winners in a conflict. It will be a “destruction of the world-based order,” he said. “The geopolitical landscape would change completely.” He added that if some military tried to take over the company by force, it would no longer be operable because it needs a real-time connection with external suppliers.
Meanwhile, all the major US chip companies get a large share of their sales from China.
Qualcomm, Nvidia, Intel and Advanced Micro Devices have revenue exposure to China of about 66%, 26%, 26% and 24%, respectively, according to FactSet. Any clash could also affect Apple’s manufacturing base; almost all of its iPhones are manufactured in mainland China.
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The CHIPS and Science Act, which Congress passed last week, includes more than $50 billion for domestic semiconductor production and research. This is partially seen as a safeguard against Chinese action against Taiwan. But it will be several years before the US plants subsidized by the law become operational, and the subsidies are spread over five years, lessening their immediate impact.
The good news for investors could be the fact that the US and Chinese tech economies are so intertwined. So while the stakes are high for investors, they could be even higher for China’s leadership, which risks hurting its own economy if it destabilizes its tech manufacturing complex.
This article was first published on August 2 by Barron’s.
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