Two long-term threats to TSMC: US and SMIC

TSMC

TSMC is too strong right now

In an interview a few months ago, the host asked me about the prospects of TSMC in the summary. I remember what I said: It is very safe to buy TSMC within five years, because there is no rival; it should be safe within ten years.

It is impossible for semiconductor manufacturing peers to catch up with TSMC in the short term. My so-called short-term is within 2 to 3 years. It is not that the probability is very small. As far as the matter we are discussing, it is impossible to happen. It’s not just a question of money (if it is, it’s not Intel or SMIC that sits on the throne now, not TSMC). The reasons are complicated, but most reasons are in my book “The Rules of Super Growth Stocks Investing”. Sections 1-6, have been explained very clearly.

You can’t find any well-known semiconductor company that can be named and is not a customer of TSMC (ticker: TSM). In fact, three or four years ago, we rarely saw US investors discussing TSMC. I remember that it consolidated between US$20 and US$30 in ADR for a long time, and only broke through US$30 after March 2017. After that it began to rise sharply.

Regarding the competitiveness and advantages of TSMC, I have a very detailed explanation on sections 2-4 of my book “The Rules of Super Growth Stocks Investing”. But today we will not talk about the advantages of TSMC, but about the potential threats of TSMC. This is a question that long-term investors should think about; it will affect the value of your holdings.

What about the threat of TSMC? The first is the United States, and the second is SMIC.

United States

US finds chip manufacturing overreliant on Taiwan

Many people think that Taiwan is a friend of the United States, and the relationship has been excellent in recent years; those who hold this opinion are in fact a typical ostrich mentality. Except for TSMC’s shareholder structure, which has already accounted for 78.48% of foreign shares in 2020, the vast majority of shareholders of 78.48% are of course American (If you think the shareholder structure is nothing to do with what we are talking about, please think back.

However, in the ByteDance ‘s TikTok case just a year ago, the controlling US shareholders joined forces to force ByteDanace’s overseas business to be sold to American companies; but ByteDance is obviously a mainland Chinese company (For TikTok, please see my blog post “Let’s talk about TikTok“). There are always only interests in business, no friends. Americans have been aware of the danger of long-term dependence on Taiwan for US semiconductor manufacturing since the Trump era. This is also the biggest reason why TSMC was forced to set up factories in the US (in terms of profit, this matter is completely illogical. Opinions on sections 2-3 of my book “The Rules of Super Growth Stocks Investing”).

After Biden took office, the U.S. government directly issued news several times to point out the danger of long-term dependence on Taiwan for U.S. semiconductor manufacturing (U.S. customers contributed 62% of TSMC’s annual revenue in 2020, almost 2/3, which shows how serious the problem is). It is now listed as a national security issue in the United States, led by the White House, and has formulated a number of localization plans for semiconductor manufacturing.

It’s just that the Taiwanese media’s ostrich mentality, and it has long been habitual to report the good and ignore the worry; the self-interpretation of local media unilaterally always said the United States is mainly to deal with the Chinese mainland SMIC, and TSMC has been invited to participate in the discussion.

The spearhead of the transformational plan was actually TSMC, not SMIC at all. Because American was forced to block the EUV machine in the short term, SMIC is impossible to enter a more advanced manufacturing process. The proportion of SMIC’s North American customers is very low. In Q2 of 2021, it was only 13.8%. SMIC basically did not need to accept American customers, because the orders of Chinese customers could not be completed.

News highlights

Let me briefly list the important developments:

  • Worried about something in Taiwan? Japan and the United States are rumored to develop 2-nanometer chips, with mass production in 2025 (7/29/2022)
  • Samsung Lee Jae-yong meets Intel Patrick P. Gelsinger met to cooperation (5/31/2022).
  • In order to reduce dependence on TSMC, the United States and Japan will cooperate in the development of advanced processes and officially exclude Taiwan. The U.S. and Japanese governments signed the contract of “Basic Principles of Semiconductor Cooperation”, aim to production 2nm semiconductor in Japan (5/4/2022).
  • US Secretary of Commerce Raymondo: The US will force TSMC and other foundries to hand over confidential corporate data such as chip inventory, orders, and sales records. The White House gave a deadline, requiring the industry to automatically hand over the data within 45 days. She was asked how the United States would respond if the company did not hand over the data? Raimundo threatened that the U.S. naturally has a way to get these manufacturers to provide data, and more bluntly, “I hope not to go to this point, but we will do so if necessary.” Other sources pointed out that the U.S. fears to quote the “National Defense The Production Law” forces semiconductor companies to hand over materials such as inventory and sales (9/29/2021).
  • US Secretary of Commerce Raymondo: Want to reduce dependence on Taiwanese chips manufacturing and subsidize foreign chip factories? Biden decided (7/30/2021).
  • The United States put pressure on TSMC and urged TSMC not to expand its 28nm wafer foundry in Nanjing, China (7/12/2021).
  • Intel’s chief executive urged that the US government’s US$52 billion in semiconductor manufacturing subsidies should not be given to companies that only set up factories in the United States, but whose process technology and IP patent rights do not belong to the United States. /6/2021).
  • White House Supply Chain Health Check: Semiconductors are too dependent on Taiwan (6/9/2021).
  • The US report emphasized the cooperation between semiconductors and Japan and South Korea, and did not mention Taiwan (6/8/2021).
  • Unwilling to rely on TSMC and Taiwan for chips, the United States wants to build another six or seven chip factories (5/28/2021).
  • Get rid of relying on Taiwanese chips! Expert advice: Designed in Japan and made in the United States (5/10/2021).
  • The United States plans to hold a meeting on the chip issue on 4/12/2021. Only one non-US company, Samsung Electronics (ticker: SSNLF), is invited on the list.
  • Japan and the United States will cooperate on establishing a semiconductor industry chain that does not depend on specific regions for production, and establish a working group (4/3/2021).
  • The United States and Japan plan to build another semiconductor supply chain, but Taiwan is excluded (4/2/2021).

Let history speak

After reading these developments above, if you still think that I am unreasonably worried; I am talking nonsense, this kind of thing, U.S. chokes TSMC is impossible. Then I advise investors with such a mentality to have the opportunity to:

China’s SMIC

SMIC is the leader after TSMC and Samsung

SMIC is currently the fourth or fifth place in global semiconductor manufacturing. In fact, everyone shouldn’t pay too much attention to the ranking after Samsung, because the gap is not big and ranking is of no significance. That being the case, why am I taking it out here? The reasons are as follows:

  • The Chinese market is huge, and China is currently the world’s largest semiconductor market. Since China became the world’s largest semiconductor market in 2005, its scale has been steadily increasing. In 2018, China has consumed 2/3 of the world’s semiconductors. In 2020, China’s semiconductor market will reach 143.4 billion U.S. dollars (much larger than China’s total crude oil imports), but the self-sufficiency rate is only 15.9%. In 2020 alone, China imported about three-quarters of the world’s semiconductor wafers (the number in 2018 was 2/3), which is an amazing number!
  • SMIC is the only company capable of high-end processes below 7nm besides TSMC, Samsung, and Intel. If it is not for pressure from the United States, ASML (tick: ASML) prohibits the shipment of EUV machines to SMIC. SMIC’s 7-nanometer chips have already been shipped (this is what SMIC’s CEO has publicly disclosed several times – the technology and everything are already available, only the EUV machine is owed), this is what the world knows and the agreement is not news for a long time. Sooner or later SMIC will overcome the only bottleneck of the EUV machine (whether it is bought, built by itself, or found a viable alternative; and I don’t think this bottleneck will be allowed to be delayed for a long time); because of technology, SMIC already possesses talents, market, and money, which are more important determinants for semiconductor foundry.
  • In the long run, Samsung will not be TSMC’s rival, SMIC is. The reason is that I have a very detailed analysis on section 3-3 of my book “The Rules of Super Growth Stocks Investing”.
  • With the exception of TSMC, Samsung, and Intel, other wafer foundries have long since been unable to afford astronomically huge capital investments, and they have all given up no longer investing in advanced manufacturing processes below 12 nanometers. In other words, there are only four players in the advanced semiconductor manufacturing process.
  • What about Intel? Intel’s internal problems are piling up, not money and technology only (see my other article “This company is changing the gaming rules” and my book “The Rules of Super Growth Stocks Investing” sections 3-7 for Intel’s detailed analysis), it is not a factor that can be solved within 3 to 5 years.

How is SMIC currently performing?

SMIC’s performance is actually very close to that of the third largest wafer foundry, GlobalFoundries (ticker: GFS), and its profit margin is much higher than that of any US or European foundry. This is what Americans are worried about. As of mid-2022, Intel does not have any chips produced by the 7-nanometer process in the market, and Intel is also developing its foundry business. The most advanced process in US or European foundries is only GlobalFoundries’s 12-nanometer process.

7nm does not need EUV lithography machine at all

In fact, the manufacture of 7-nanometer wafers does not require Esmol’s EUV machine at all, and TSMC’s 7-nanometer does not actually use EUV lithography machines.

SMIC’s 7nm chips have already shipped

SMIC’s cryptocurrency mining customer MinerVa has long said that SMIC’s 7-nanometer wafers has already started production as early as July 2021.

TSMC

Closing words

TSMC’s competitiveness will still have no rivals within 2025, but no company is perfect and can maintain strong long-term competitiveness for a long time, because this is the characteristic of capitalism. Long-term investors must still pay attention to the long-term threats of the companies you invest in.

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