Notes from the Danger Zone: There’s an old saying in the stock market about magazine covers: By the time a trend or idea finally graces the cover of a magazine, it has peaked.
It has to do with the amount of time it takes for an idea to get going, to finally be noticed by those directly impacted, then investors, experts and thinkers, and then filtered into the media, and finally, to the slower moving weekly magazines.
An Internet corollary to that idea might be: Now that it’s made the cover, it must be dissected, flogged repeatedly, then beaten and whipped, endlessly.
One of the more absurd reasons proposed for China to invade Taiwan is for its semiconductor industry.
In particular, chip foundry giant TSMC, the global leader in cutting edge semiconductor production.
On the surface, the idea sounds reasonable. Despite decades of effort and hundreds of billions of dollars wasted, China has little to show for its own attempt to build a successful semiconductor industry. Why not just invade Taiwan and take it?
That China might want to copy the method used by Taiwan or South Korea (both late-comers) to build their semiconductor industries seems not to have occurred to China.
A lack of patience and long term planning plagues China’s semiconductor efforts. China wants a fully developed semiconductor industry, today. It doesn’t work that way.
But that’s a story for another day.
Today’s story is why invading Taiwan is not the answer to China’s semiconductor problems.
The simple answer, the one to allow the reader to end on this sentence, is that under Chinese rule, TSMC would lose its semiconductor leadership within months because it would lose access to the production equipment, materials, customers, intellectual property and software required to remain at the cutting edge.
It would be like pirates taking over a fishing boat for its big catch. The fish are valuable, but if no ports are open to them, they rot on the ship.
TSMC is an excellent company, with great engineering and research. Yet like all chip makers, it is part of a global industry and relies heavily on partner companies around the world.
Not one of the companies it needs is in China.
For example, TSMC does not make production line equipment. The semiconductor machinery it requires comes mainly from Japan, the Netherlands and the United States. Under Chinese rule, it would no longer be able to purchase the equipment needed to produce cutting edge chips.
Many equipment makers would lose a massive customer in TSMC under an invasion scenario, a customer that also works side-by-side with them on difficult engineering tasks required to develop new machinery. It would be a tremendous blow to both sides.
TSMC’s own customers, the chip designers like AMD, Nvidia, and Xilinx that push it to the cutting edge, might also have to pull back. Politically, could they continue to do business with TSMC under Beijing’s rule? Would U.S. law allow it after the invasion of a strategic partner?
A lack of risk management on the part of some U.S. chip designers has left them exposed in the event of such an invasion, so NOT working with TSMC might destroy them.
Talk about having all your eggs in one basket.
TSMC also does not make most of the semiconductor materials it requires for production, including gases, photoresist, chemicals, and the main ingredient, silicon wafers. Some of these materials are available through Taiwan suppliers, but the majority are purchased from Japan, Germany and elsewhere.
Intellectual property and electronic design software would be another major area of concern for TSMC, in the event of a China takeover. Would licensing arrangements remain in effect? Would regulators around the world shut TSMC off from needed IP and software?
Finally, there is a strange idea that a TSMC chip factory might be the safest place to be in Taiwan during a China invasion. Some seem to believe China would avoid destruction of semiconductor factories at all cost – to avoid damaging the prize.
And yet in war, there really are no safe places, and a TSMC fab might, in fact, be the most dangerous place on earth.
If it looked like China might succeed, would Taiwan forces decide to destroy vital assets in order to deny them to the Communist Party? The Republic of China (Taiwan) and the People’s Republic of China (China) have been adversaries for 100-years now. A lot of bad blood can build up over a century.
Even if it’s not an official policy, renegade units might decide to keep China from winning key prizes.
Beyond that, how might Japan or the United States react to the idea of advanced semiconductor fabs falling into China’s hands? Militaries think very differently than civilians. They might decide it’s better to destroy them rather than leave them to Beijing.
Finally, if it appeared China might fail – would it retreat gracefully? Or would Chinese missiles rain down on Taiwan, destroying factories and infrastructure?
The best idea for now remains the status quo. There’s no need to raise dangerous ideas like holding up TSMC as a reason for China to invade.
If China wants to win a semiconductor industry through war, it will have to invade Europe, Japan, South Korea, Taiwan and the United States in order to succeed.
Otherwise, it would be left with nothing but a proverbial boatload of rotting fish.
Disclaimer: Blog posts and other information on TriOrient Investments' web site (3-orient.com) do not constitute investment advice. TriOrient Investments is a private company and does not accept outside funds for investment, nor does it divulge trading activity, nor provide recommendations of any kind to buy or sell any kind of investment product. This material is provided for informational purposes only. The views expressed regarding market, economic, industry or corporate trends are those of the authors and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets, sectors or firms will perform as expected.
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