China needs Taiwan more than Taiwan needs China when it comes to semiconductors.
Following the contentious visit to Taiwan by U.S. House Speaker Nancy Pelosi, Beijing suspended certain trade with the island this month.
Notably, electronics were exempt from the bans. According to a 2021 Boston Consulting Group assessment, Taiwan is home to more than 90% of the manufacturing capacity for the most sophisticated semiconductors in the world.
The largest and most important chip manufacturer in the world, Taiwan Semiconductor Manufacturing Company, was on Pelosi’s agenda. Everything from consumer goods to military planes depend on its products.
But according to the business, only 10% of TSMC’s revenue originates from China. The US accounts for more than half of its revenue.
“As we speak, the status quo is that these chip companies may not be as dependent on China as the other way around,” Patrick Chen, the CLSA’s Taiwanese head of research, said.
“I think the real challenges for these companies are still coming from the end demand, rather than what’s going on geopolitically,” he said.
American chip manufacturers Micron and Nvidia have recently issued warnings over dwindling demand for devices utilizing their technology.
The crucial part of TSMC
Pelosi’s visit to Taiwan took place in defiance of Beijing’s warnings, which believes the democratically self-governing island is a part of its territory and has no right to manage its foreign affairs freely. The United States maintains unofficial ties with Taiwan despite recognizing Beijing as the only legitimate government in China.
Beijing has increased military drills surrounding the island of Taiwan in addition to various trade restrictions, which has caused some people to worry about the potential damage to world access to crucial semiconductors.
Analysts stressed that Taiwan-made chips, particularly those produced by TSMC, are too essential to China and the rest of the globe for there to be any significant disruption in the semiconductor market.
“If you look at the secular demand drivers, cloud infrastructure, electric vehicles, next generation of industrial facilities, they all require chips that are made at TSMC,” Mehdi Hosseini, a senior hardware analyst at Susquehanna, made the statement.
“If, God forbid, TSMC’s fabs in Taiwan cannot operate, I think the global economy would slow down more so than what Covid did [to growth],” he said.
Chen from CLSA referred to TSMC as being in “a league of its own,” Taiwanese chipmakers UMC and GlobalFoundries as being in the second tier, and China’s SMIC and Hua Hong Semiconductor as being in the third tier.
“In terms of competition, coming from China, it’s not a real, meaningful threat to be expected anytime soon,” he said.
The chip industry in China is still lagging
Beijing has increased its chip-building efforts in recent years, thanks to rules that encourage investment. Despite recent growth and technological advancement at another Chinese chip behemoth, Semiconductor Manufacturing International Corporation, the debt accumulation and default of state-owned chip business Tsinghua Unigroup demonstrate how the system has been prone to waste.
However, according to Hosseini, it took SMIC 15 years to catch up to TSMC’s position at the time.
“China does not have access to leading edge equipment,” he said. “It would take a long time to have the engineering knowhow.”
The United States effectively forbade Chinese tech giants Huawei and SMIC from utilizing American technology, particularly its chip manufacturing machinery, under the Trump administration.
As a result, TSMC would no longer be able to produce semiconductors for Huawei starting in late 2020.
According to David Hsu, associate director at S&P Global Ratings, between 2018 and 2020, TSMC’s China revenue increased to over 20% of the company’s total sales.
But according to Hsu, in 2021 TSMC’s exposure to China decreased once more to just 10% of total revenue. “After the Huawei ban, [TSMC] shifted its capacity to other companies.”
The business of TSMC has remained robust. The business, a significant Apple supplier, reported second-quarter sales of approximately $18 billion, up more than 40% from the same period last year.
This illustrates how much bigger TSMC is than SMIC, whose revenue for the same quarter was $1.9 billion, up more than 40% from the same period last year.
An act of compromise with the U.S.
Additionally, the U.S. is working to bolster its access to essential semiconductor technology. The Chips and Science Act, which provides incentives to chip manufacturers to produce their products domestically, was signed into law by U.S. President Joe Biden this month.
In a research this month, Bernstein analysts stated that they anticipate a “lukewarm” impact on TSMC.
“Strategically TSMC is ‘everybody’s foundry’ in order to diversify customer base to reduce risk and increase scale, and will strive to stay neutral in the competition of the US and China,” the report said. “Considering these, we think TSMC likely will still keep its overseas capacity expansion in check in the next few years even with the incentive of the CHIPS Act now.”
According to Bernstein projections for the fourth quarter, 10% of TSMC’s capacity is located in mainland China as opposed to a far smaller percentage in the U.S.
A facility being built by TSMC in Arizona will cost $12 billion. The business has offices in Shanghai and Nanjing on the mainland of China.
However, according to Chen of CLSA, manufacturing in China will continue to be centered on older, legacy technology, for which there is a sizable market on the mainland, due to Taiwan’s constraints on chipmakers’ investment.
