Following US House Speaker Nancy Pelosi’s contentious trip to Taiwan earlier this month, Beijing banned certain commerce with the island.
Notably, the prohibitions did not apply to electronics. According to a 2021 Boston Consulting Group assessment, Taiwan has more than 90% of the world’s sophisticated semiconductor production capacity.
Pelosi’s schedule includes a stop at Taiwan Semiconductor Manufacturing Company, the world’s largest and most important chipmaker. Its products are used in anything from consumer goods to military aircraft.
However, according to the business, China accounts for only 10% of TSMC’s sales. The United States accounts for more than half of its income.
“As of now, the status quo is that these chip businesses may not be as dependent on China as they are on the other,” said Patrick Chen, head of research for CLSA in Taiwan.
“I believe the fundamental issues for these organizations continue to come from end demand, rather than what’s going on geopolitically,” he added.
Micron and Nvidia, two American chipmakers, have recently issued warnings about dwindling demand for devices that employ their technology.
Pelosi’s journey to Taiwan occurred despite warnings from Beijing, which considers the democratically self-governed island to be part of its territory with no right to conduct independent international affairs. The United States acknowledges Beijing as China’s sole legal government while maintaining unofficial relations with Taiwan.
In addition to various economic restrictions, Beijing has increased military maneuvers surrounding Taiwan, increasing concerns about global access to vital electronics.
Analysts stressed that Taiwan-made semiconductors, particularly those manufactured by TSMC, are far too essential to the globe and to China for any substantial disruption in the chip market.
“If you look at the long-term demand drivers, cloud infrastructure, electric cars, and the next generation of industrial facilities, all of them require chips built by TSMC,” said Mehdi Hosseini, senior tech hardware analyst at Susquehanna.
“If, God forbid, TSMC’s fabs in Taiwan cannot operate,” he remarked, “I believe the world economy will slow down more than what Covid did [to growth].”
CLSA’s Chen characterized TSMC as “in a league of its own,” Taiwanese semiconductor giants UMC and America’s GlobalFoundries as tier two chipmakers, and China’s SMIC and Hua Hong Semiconductor as tier three chipmakers.
“In terms of competitiveness, coming from China, it’s not going to be a genuine, substantial challenge anytime soon,” he added.
In recent years, Beijing has increased its chip-building efforts, with supporting regulations attracting a flood of private cash. Despite recent growth and technological improvement at another Chinese chip powerhouse, Semiconductor Manufacturing International Corporation, the debt pileup and default of state-owned chip producer Tsinghua Unigroup demonstrate how the system has been prone to waste.
Still, it took SMIC 15 years to catch up to TSMC ten years ago, according to Hosseini in a phone interview last week.
“China does not have access to cutting-edge technology,” he remarked. “It would take a long time to learn engineering.”
The Trump administration effectively prohibited Chinese tech behemoths Huawei and SMIC from utilizing American technology, including chipmaking equipment.
This meant that TSMC would no longer be able to manufacture semiconductors for Huawei after late 2020.
According to David Hsu, assistant director at S&P Global Ratings, TSMC’s China revenue increased to roughly 20% of total sales between 2018 and 2020.
However, TSMC’s exposure to China will fall back to roughly 10% of total sales in 2021, close to levels experienced in 2017, according to Hsu. “[TSMC] transferred its capacity to other firms following the Huawei ban.”
The business of TSMC has remained robust. The business, a major Apple supplier, posted second-quarter revenue of almost $18 billion, up more than 40% from the previous year.
This demonstrates how much larger TSMC is than SMIC, which recorded revenue of $1.9 billion for the same quarter, up more than 40% year on year.
The United States is likewise attempting to strengthen its access to crucial semiconductor technology. The Chips and Science Act, which provides incentives to chipmakers for manufacturing in the United States, was signed into law by US President Joe Biden earlier this month.
In a recent research, Bernstein analysts predicted a “lukewarm” impact on TSMC.
“Strategically, TSMC is ‘everybody’s foundry’ in order to diversify client base, decrease risk, and gain scale, and will aim to remain impartial in the competition between the US and China,” according to the article. “Considering these factors, we believe TSMC will continue to limit its overseas capacity expansion in the coming years, even with the CHIPS Act’s current incentive.”
According to Bernstein projections for the fourth quarter, about 10% of TSMC’s capacity is in mainland China, compared to a far lower percentage in the United States.
TSMC is investing $12 billion in the construction of a facility in Arizona. The corporation has offices in Shanghai and Nanjing on the Chinese mainland.
CLSA’s Chen, on the other hand, stated that the Arizona plant would focus on more modern technology, but Taiwan’s constraints on chipmakers’ investment into China imply that manufacturing will stay focused on older, legacy technology – for which there is a significant market on the mainland.