semiconductor wars (ii)

If there has been a strategy to the Trump administration’s actions on semiconductors, it has been to try to lessen China’s dominance in advanced communication technology by denying China’s national champions access to state-of-the-art semiconductors that are either: manufactured in the US or that contain US intellectual property or that are manufactured by machines that use US intellectual property.

At the same time, however, Trump has substantially weakened the domestic technology industry by denying skilled industry workers entry to the US, based on his white racist ideology. He has also undermined the finances of domestic research universities by encouraging violence against Asian students, thereby discouraging them from coming to the US and enrolling. My point is that there seems to have been no long-term strategy to strengthen US tech and to close the 5G gap with China (in fact, quite the opposite), but rather only the simple-minded notion of doing near-term harm to firms like Huawei.

TSMC has already agreed to send lagging-edge machinery to a new foundry it intends to construct in Arizona and Intel has promised two more. Samsung is also planning to open a combination fab (for itself)/foundry in Texas. Plans for both are under threat, though, by current Trump-inspired legislative proposals in AZ and TX to suppress voting in Democratic areas of those states. Intel and AZ faced a similar situation in 2014, with large companies threatening to leave the state after the legislature passed a bill permitting merchants to refuse to serve LGBTQ customers. Under immense pressure from businesses, which the legislature shrugged off, the governor vetoed it.

How events will play out over the next ten years is hard to say. As an investor, however, one thing that interests is the idea that the semiconductor manufacturing industry has been made substantially less efficient today than it was even a year ago. China must take much more seriously than the lip service it has given to date to the need to develop its own chip manufacturing capabilities. Non-China firms that want to sell to China must now have both their research and the fabs they access located outside the US. The US, in turn, is suddenly aware of how dependent it is on TSMC and demanding to have state-of-the-art manufacturing facilities located domestically.

To me, this implies there’s going to be very strong demand, likely for years, for new semiconductor manufacturing equipment to fill fabs that will be built in both China and the US. Yes, there’ll be excess capacity, and yes the plants won’t be humming along at profit optimizing speed. But that will be a secondary concern, I think. The primary objective will be for plants to be either under control of the China camp or the US–because neither camp is likely to make its most advanced chips available to the other side.

What happens to TSMC, the world’s undisputed technology leader, is unclear, although recent reports say that, given Biden administration incentives, it is planning on opening as many as six new fabs in AZ.

This has never been my favorite area of tech and, I think, has typically not had the zip of the chip companies themselves. But I think circumstances have changed. I’ve been learning on the fly and already have established positions in AMAT, ASML and LRCX. These aren’t recommendations, just disclosure that I have an interest in this area.

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