A World Leader in Chips and Fighting Covid
A World Leader in Chips and Fighting Covid
War risk is “consistently underestimated by money people” says FT commentator John Dizard following the escalation of tensions between China and Taiwan. The latter runs itself as a highly successful independent nation, but China insists it is a breakaway province that it is determined to recover.
In recent weeks China has sent several batches of its warplanes into Taiwan’s air defence identification zone as part of war games simulating missile attack on the US aircraft carrier Theodore Roosevelt – the kind of public posturing that could easily trigger violent conflict should Taiwan be provoked into shooting down such intruders.
That may sound farfetched. But who predicted the devastating pandemic?
There are grounds for fearing war over Taiwan. Chinese president Xi Jinping has publicly threatened, presumably by deploying its massive armed forces, to end Taiwan’s 70-year-long rebellion as it “cannot be passed on from generation to generation,” suggesting that he intends to resolve the issue before he leaves power.
The Americans, on the other hand, have increasing reasons for making sure that the island remains safe from Chinese attack.
Semiconductor chips are well on the way to becoming the world’s most important industry as they are essential components in so many things – electronic gadgetry, cars, aircraft, telecoms equipment… and, increasingly, weapons.
80 per cent of the world’s supplies are made in Asia, including most of the advanced chips. Taiwan is the most important design, development and production centre. The newly-opened $20 billion factory of TSCM in the south of the island is one of only two in the world that can churn out “frontier” micro-chips measuring just three nanometres (billionths of a metre).
Driven by fear of Chinese rising power, the Americans say they must have strategic supremacy in semiconductor chips. “How can they have that,” Dizard asks,” without Taiwan, the Ruhr of the electronic age?” [The explosive growth of Germany’s heavy industries there led to the first world war].
Recently the US has been strengthening its public commitment to Taiwan. The Trump administration lifted its self-imposed restrictions on diplomatic contacts and authorized sales of advanced weaponry. The Democrat administration is sticking to a similar tough line: Joe Biden broke with precedent by inviting Taiwan’s representative to his swearing-in ceremony.
Although the Chinese desire to rule the island is primarily a political imperative, the prospect of gaining control over the world’s leading chip industry is clearly of increasing importance. A domestic world-class semiconductor industry is one of the big missing ingredients to China’s ascension to number one position internationally.
Considering the extreme difficulty in implementing an invasion across the 180-kilometre Taiwan Strait, the logical alternatives would be to use naval forces to force the island into submission or air attacks to destroy its factories in a beggar-thy-neighbour strategy. Given America’s commitment to Taiwan’s defence, it would be another Cuban missile crisis.
It could happen within a generation, but doesn’t look like an immediate prospect.
Last year was a devastating year for the world, but an excellent one for Taiwan. It was the first country to identify Covid-19 as a killer virus and report it to the World Health Organization and the first to start screening arrivals from Wuhan. Its contact-tracing and other policies were so well-organized and effective in containing the virus that the death-toll in this country of 24 million has been just nine. The island never went into a full lock-down.
The economic damage done by the pandemic has been so limited that last year it was one of a small handful of countries that achieved positive growth. Exports rose 5 per cent as its factories were well-positioned to serve global demand for products such as tablet computers and headphones as millions were forced to stay at home. Its all-important semiconductor sector has also gained from China’s diversification away from US suppliers in the ramping up of 5G technology, and from the Trump administration’s tariffs on Chinese products, which encouraged Taiwanese with operations in China to move their production back to Taiwan.
Domestic factors have also spurred the economy. A renewed capex cycle has been reflected in improving consumption. The property market has been heating up , with real estate lending accounting for 36 per cent of all bank loans.
Jefferies’ global head of equity strategy Chris Wood reports that Taiwan’s stock market was Asia’s second best performer last year, after being the best in 2019. From a valuation standpoint the bourse is now trading on 19.6 times forecast earnings growth of 14.7 per cent
The dominant tech sector accounts for three-quarters of listed stocks. Chris’s choices are TSCM, Silergy and MediaTek. I also like Novatek Microelectronics.
A World Leader in Chips and Fighting Covid taken from our ‘On Target Newsletter’ issue no 265
