I’m not a seismologist. In fact, I’m not a scientist of any kind, unless you count political science which, unfortunately, a lot of people in my academic peer group did and surely still do.
Given my complete lack of professional expertise in the natural sciences (which is to say real sciences or “hard” sciences, so to speak), I’m not qualified to posit a link between earthquakes and climate change. But I bet there are links, even if we don’t fully appreciate or understand them all just yet.
One link I can posit because I’ve observed it just like everybody else who’s lived through the first three years of the 2020s, is the connection between natural disasters and supply chain disruptions. The pandemic was a wake up call to economists: For all its merit, just-in-time can be dangerous folly, and economic specialization, long regarded as unequivocally good, is inherently risky.
We should’ve known. Hindsight’s 20/20, as the apology goes, but someone, somewhere might’ve gently pointed out that a globalized system which depends entirely on the free flow of everything, all the time, just in time, might be a very vulnerable system in the event some calamity inhibits that flow. The 2020s have witnessed a succession of calamities, some natural others man-made, and that distinction (between natural disasters and disasters attributable to our species’ penchant for self-destructive behavior in pursuit of myopic goals or simply to sate our worst impulses) is getting harder to draw.
One way or another, it seems we’ve entered an era of rolling disasters, and that’s inflationary in part because disasters tend to disrupt the supply chains at the heart of our globalized economy. “Fixing” the problem with re-shoring tends to be inflationary too for a variety of reasons, not least of which is that domestic labor’s more expensive. That’s why we outsourced in the first place.
That’s the lens through which investors should view Taiwan’s worst earthquake in a quarter century, a 7.4-magnitude tremor that collapsed more than two dozen buildings and left four dead and scores injured. The full scope of the damage isn’t known, but this counts as a disaster and at a time when Taiwan is the epicenter (sorry) of many a bull narrative. And many a geopolitical worst-case. (Anyone see some tension there?)
The world’s almost entirely dependent on the island for advanced chips at a time when the fate of markets, the macro and, in many narratives, the species itself, turns on high-end semiconductors. If that seems absurd to you given Taiwan’s existential vulnerabilities, you’re not wrong.
The country (and if you ever find yourself hanging out in Beijing, don’t call it a country unless that country’s China) is a fault line. Figuratively: It’s a physical manifestation of the friction between autocracy and democracy. And also literally: It sits on the boundary between two tectonic plates.
Suffice to say Taiwan’s in a pretty precarious position — just in general, but especially as global linchpins go. Whether or not this week’s disaster impacts semiconductor production, it should be yet another clarion call: The design, development and production of the world’s most advanced computer chips simply can’t be confined to an island in the Pacific Ring of Fire, particularly when that island’s an acquisition target for a revanchist dictator.
As Bloomberg reminded the world on Wednesday, following the quake, Taiwan is the source of between 80% and 90% of the highest-end chips. “There is effectively no substitute,” the linked article not-so-gently noted.
You don’t have to be any sort of expert on… well, on anything, really, to understand why that’d be completely untenable even in a world where everyone got along famously. This isn’t such a world.
At any given time, a catastrophe — man-made or otherwise — could effectively curtail the entire supply of advanced chips. The locus of concern is (obviously) TSMC. The same linked Bloomberg piece noted that in consideration of “rising national security concerns and supply chain disruptions, governments in the US, Europe and Japan urged TSMC to diversify geographically.” And yet, for various reasons, the most advanced chips still come only from Taiwan and there’s no real indication that’s going to change.
The Washington Post on Wednesday noted that the island’s earthquake preparedness is “among the most advanced in the world.” That’s according to Stephen Gao who, unlike me, is a seismologist (he’s also a professor at Missouri University). “The island has implemented strict building codes, a world-class seismological network, and widespread public education campaigns on earthquake safety,” he told the Post.
That’s all fine and good, but you can only be so “prepared” for a natural disaster. That’s the thing about natural disasters: They can be devastating regardless of “preparedness.” Just ask an insurance company who’s written a property policy in California or Florida. The same goes for wars. Just ask Ukraine.
Bloomberg quoted an expert at a German think tank. Taiwan, Jan-Peter Kleinhans said, is “potentially the most critical single point of failure” in the global semiconductor industry. This is another case where you don’t need to be an expert of any sort to make a definitive claim: There’s no “potentially” to it. Taiwan is the “most critical single point of failure,” and with apologies, the odds that it fails at some point over the next decade or two are far higher than the odds that it doesn’t.
I have a modest suggestion. The US should impress upon Lai Ching-te (who takes office in May) the imperative of TSMC’s overseas investments. The White House might “suggest” the company put its most advanced processes in place at a US-based plant as an insurance policy. And maybe the incentive isn’t just billions in US federal grants, but also security guarantees. If we guarantee your democracy, implicitly or otherwise, you guarantee our supply of advanced semiconductors by exporting the relevant know-how to a plant located somewhere that can’t be bombed or seized by the PLA.
After all, Taiwan has “a responsibility to give back to the international community,” as Lai put it in August.
The news on TSMC’s fab plant in AZ has been discouraging in the past few months, troubled as it has been by a shortage of workers and various delays. However, two days ago there was a news release (in Chinese – I haven’t seen a link) that apparently stated that, at least for the 4nm fab things were actually going ahead of schedule and that they hope to see some level of commercial production begin before year’s end (the higher end 3nm fab is foreseen to begin production in 2027). TSMC has a financial conference call scheduled for April 18 where it is expected that we will learn more.
Excellent. As an investor in Micron and Western Digital, I’ve always found it a little curious, not to mention more than a little disingenuous, that whenever potential frictions develop with China, these companies (and most of the rest as well) tend to tout their Taiwan strengths, sort of as if it were some non-China China sanctuary — all the benefits abd diversification with none of the direct risks. At a minimum, as this post underscores, we are drifting away from the ideal pole we’ve enjoyed for a long time now and now heading straight for “less of the benefits with more of the risks.”
And if AI were truly worth its salt, it would be screaming at us to get its heart and soul off that island.
Mr H I need to correct you, TSM are already building the most advanced chip manufacturing plants in Arizona. Production of the 4nm chips will start at the first plant in ’25.
There’s no need to “correct” me. Until that plant starts turning out cutting-edge technology at a rate that’s sufficient to supply the US with the chips it needs in the event Xi invades Taiwan, or blockades it, or a natural disaster cripples production, then this remains a “promises, promises” type of thing.
And maybe I should’ve been a little clearer. What I mean is that the White House should say: “Listen, if you want us to risk American lives in a military-to-military confrontation with Xi’s army, then you’re going to move heaven and earth to get your most advanced processes in place and running as quickly as possible on American soil, and there aren’t going to be any more excuses. If that means you have to fly part of your Taiwan staff over here and we have to find housing for them in Arizona (or wherever), then that’s what it means. But there’s not going to be any more foot-dragging.”
I mean, seriously. Think about this: We’re guaranteeing, essentially, that the US would engage in a conflict that’d probably fire the starting gun on World War III to protect that little place, and there’s still a very real sense in which TSMC is determined to keep its most advanced capabilities domestically-located. That’s not tenable. These aren’t potato chips. Or sedans. We need those damn semis. And given what it is we’re (implicitly) promising to do for Taiwan in the event Xi pulls a Vlad, we should have them.
I hope people and the system listens to this sensible discussion. It makes no sense to increase WWIII risk by acquiescing to TSMC’s desire to monopolize semi production in Taiwan. Just putting one plant on U.S. soil dedicated to one company does not resolve any crisis, it may just whet an appetite for conflict.
Maybe we should push harder on TSMC’s customers since that has had some results. We could also push cooperation with the other members of G-20 to buy local for all chips. Would tariffs be enough or do we continue the carrot approach also?
Excellent recommendation Mr. H. A lot of that CHIPs Act $$$ money should be going to subsidize relocating and paying salaries of experienced Taiwanese engineers to start making the most advanced and strategically vital semiconductor chips here now, rather than subsidize Intel to build some giant boondoggle plant in Ohio and wonder if they will even be successful in manufacturing the most advanced chips by 2030. Also, the production capacity here should be reserved for the most strategically vital accelerated computing chips initially, and not whatever chips Apple needs for their latest MacBook or iPhone.
I think the Biden team needs to 1-issue the 500 visas for Taiwan staff to pick up the pace at the plant in AZ, 2-not listen to the local unions opposition to this, and 3-finish the contract for US funding already appropriated. Taiwan just replaced the guy heading the AZ project because of the delay.
It’s not a given that they meet that goal at that date.
Those 4nm chips are not the most advanced node.
That said, tech insiders suggested that the 4nm was NOT their original plan but was forced upon TSMC during a meeting between Tim Cook from Apple, TSMC’s largest customer, and the then chairman of TSMC. In return, Apple promised to take ALL of the output from the first AZ fab. (Sorry AMD & Nvidia.)
Why did Cook have to pressure TSMC? It’s because their government puts relentless pressure on the firm to NOT place their cutting-edge technologies offshore. That is to bolster “the Silicon Shield” which they believe will compel the US to protect Taiwan from the PRC. After all, Americans will certainly support going to war so their children and grand kids will not be the only one in their middle school class without the latest iWatch!
INTC to the rescue? It only lost $7B on its foundry business in 2023. Rock and a hard place, truly.
Seems like someone’s CHIPS act was some pretty forward thinking, eh??
Not knowing much, but just thinking: If TSMC meaningfully moves chip production to the U.S., wouldn’t it be much harder to count on the U.S. to risk WW III to save Taiwan? Looking through the Ukrainian lens at least, counting on the U.S. to “defend democracy” in the absence of self interest (is there a lot of other U.S. interest in Taiwan?) is tenuous at best. And how willing is China to let them go? SMIC is setting up 5 nanometer production, so how tolerant would they be about being behind? In another vein, anecdotally, I have a friend who escaped INTC manages an A to D chip design engineering group. He finds his best engineers in Mexico.
That is why Taipei pressures TSMC to keep most of their production on the island.
You bring up a good point that the monopoly creating a greater risk of WWIII is caused by market manipulation. Monopoly concentration can be reduced by way of G-20 applying pressure.
I thought about this post while looking over INTC’s recast 2021-2023 financials with Foundry and Products separated. The stock dived on the release, amid an analyst chorus about how disappointing and alarming Foundry’s losses are.
Really, that was a surprise? INTC has revenues 2-3X its nearest competitor, broadly comparable prices, and yet its margins stink. Everyone knew there’s some big money-losing going on.
The recast financials make it clear where that is. Intel 10 and Intel 7 processes are so expensive and uncompetitive that if Foundry sold those wafers at market prices – what a competitive foundry would charge – its gross margins would be negative. And so they now are revealed to be. Intel 3 is less uncompetitive, Intel 18A will be competitive, Intel 14A will be better – so INTC claims – but it won’t be until 2027 before competitive nodes are the bulk of Foundry’s wafers and Foundry is – again, claimed – solidly profitable. That’s a while away.
So investors have, I think, valued Foundry at near-zero or put another way, nearly 0X book, and repriced INTC to just the value of Product – if a decently profitable fabless semi were worth less than 15X P/E which implies no long term growth.
So I see a lot of potential revaluation over the coming years. In the meantime, I can’t think of a better hedge against a Chinese invasion of Taiwan. Well, other than HII and GD.