Global powers posture on the semiconductor industry and its impact on your portfolio
By Jason Crumley 1 March 2023 6 min read
In our series on China and its impact on the global economy, we dig into the implications of recent events to help investors better understand this particular region and make informed decisions about their investment portfolio. This information is not intended to encourage or discourage investment in specific geographic regions or specific companies. Similar to all countries, there are risks associated with investment allocation and security selection decisions.
At the forefront of the global technology race is the effort to improve semiconductor technology. Its widespread application and importance was highlighted in recent global supply chain challenges, as the lack of semiconductor supply led to shortages in everything from computers to automobiles. Adding to the complexity is the global technology trade posturing between the US and China over—at least in part—advanced semiconductor technology. This tension continues to increase through recent high-profile events, such as the high-altitude balloons that the US says poses serious risks to national security. The semiconductor industry, global trade relations and potential geopolitical risk in Taiwan (the world’s leader in semiconductor production) have far reaching implications and we look to share some insights.
What is a semiconductor?
You may have heard the term “Silicon Valley” to describe a region where many technology and innovation companies are located. This term comes from the widespread use of silicon to manufacture semiconductors in the technology sector. Semiconductors are sometimes referred to as circuits, microchips or simply chips and are made from pure elements such as silicon. These silicon chips are used to conduct electricity in a controlled manner, allowing the current to flow more freely in certain directions. It is this controlled flow of electricity that allows vehicles, cellular phones, computers, televisions and even medical equipment to perform various functions. This technology can range from very simple electronic equipment controlling binary switches or very complex semiconductors used in advanced computing and artificial intelligence.
The semiconductor supply chain and market leaders
The semiconductor supply chain is a highly competitive global market with countries such as the United States, China, South Korea, Japan and Taiwan leading the industry in digital transformation, wireless connectivity, computing, gaming and artificial intelligence. While working at your desk you may notice the Intel sticker on your computer as a small advertisement for one of the largest chip makers in the world. Other technology companies like AMD or Nvidia are global leaders in chips that drive video game consoles for market leaders such as Sony (Playstation) and Microsoft (X-box), among other devices. Outside of the US, companies like Samsung (South Korea), Semiconductor Manufacturing International Corporation (China) and Taiwan Semiconductor Manufacturing Corporation (Taiwan) are among the largest semiconductor technology companies in the world.
Largest semiconductor companies on the S&P 500
These companies are instrumental in providing technology that consumers use every day such as your computers, cell phones, home appliances, televisions and vehicles. In fact, the vehicle price inflation that we witnessed in 2021 was due in part to the microchip supply shortage which left many auto manufacturers without the key semiconductor technology needed to complete the automobile manufacturing process. This reduced the supply of vehicles to the market and dramatically increased the price of existing vehicles. We have also heard about the evolution of advanced computing and the specialized chips that are required for evolution of this technology. A great recent example of this is the popular application called ChatGPT and the new Google application called Bard. Both artificial intelligence technologies are driven by an enormous amount of computing power made possible by various global chipmakers. Given the reach that chip technology has, it's easier to see just how critical this small piece of technology is to our daily lives.
The US and China are jockeying for market leadership
With a better understanding of how critical chip technology is to our daily lives, governments are looking for ways to maintain market leadership and protect valuable intellectual property. In 2020, the US introduced two bills to incentivise semiconductor companies to construct facilities in the US. The Chips for America Act and the American Foundries Act created tax credits and billions of dollars in incentives for semiconductor companies who brought their facilities to the US. China has a similar plan labeled the Made in China 2025 with the Chinese government committing US$120 billion to improve domestic semiconductor production and technology. More recently, the US government is pressuring advanced chipmakers to stop providing China key manufacturing technology, such as those possessed by the Dutch semiconductor company, ASML. ASML is one of few companies globally that provides semiconductor manufacturers with the capability to create advanced computing microchips critical for those used in artificial intelligence applications. Recent controversy is swirling around ASML as Bloomberg reported a China-based employee of ASML is accused of stealing data from a repository that has details critical to producing some of the world’s most advanced semiconductors. When evaluating the future of semiconductor technology advancement, not only do we need to pay attention to the relationship between US and China, investors also need to pay particular attention to China’s relationship with Taiwan and Taiwan's role as a global leader in semiconductors. The threat of potential conflict in Taiwan is a critical consideration to the global semiconductor supply chain. As governments increasingly position to protect their interest and future technological advantage, companies and supply chains will need to adapt.
What does this mean for your portfolio?
Given the wide reach of the semiconductor industry, your portfolio could have significant direct or indirect exposure or even overlap with other fund investments. Many direct investments in semiconductor technology companies, such as Intel or Qualcomm, can represent a major portion of your investment portfolio and are held by many of the world's top money managers. For example, Intel Corp, with a market capitalization of US$105 billion, is held by some of the top global fund managers such as Vanguard, Blackrock and State Street.
Intel Corp. top shareholders
In its February geopolitical risk dashboard update, Blackrock increased its US-China strategic competition risk rating from medium to high and cited that the “structural tensions between the two nations presents significant risk for investors.” In a potential example of this geopolitical risk impacting portfolio allocation decisions, Warren Buffett’s Berkshire Hathaway sold most of its stake in semiconductor company Taiwan Semiconductor Manufacturing Company (TSMC) only months after disclosing an estimated US$5 billion stake. This is uncharacteristic of Berkshire as its investment philosophy tends to favour a long-term investment strategy. This has many investors questioning how much of a factor geopolitical risk was in Berkshire’s decision to sell TSMC and what potentially changed the mind of Berkshire in this short time period. Now thinking additionally about the reach of semiconductors into technology manufacturers such as Apple or Samsung and the electrification of the automotive industry, we can quickly see how interconnected these industries are.
Our first article in the series explored China’s prominent role in the global economy and its economic and political relationships with other countries. Important considerations like geographic allocation can have a significant impact on investment returns and should be considered in the context of more broad portfolio construction. Our second article focused on the various China-related events over the last few years that have impacted equity and bond markets. Finally in this article, we dive a bit deeper into an influential area of significant interest to both the US and China, how policies are influencing global trade, and the escalating geopolitical risk associated with tensions between the US and China. The purpose of a well-diversified and global portfolio is its ability to withstand a wide range of policy changes, law-making and other geopolitical events, which will provide the resilient foundation an investor needs to execute their financial plan and achieve their goals. A key step to building this portfolio is being informed about your direct and indirect geographic and sector allocation and the risks associated with these allocations.
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