The Taiwan Discount: A Global Burden Unjustly Borne by TSMC

By: Justin Leverenz, CFA and Andy Lin

Key takeaways

The importance of semiconductors.

The semiconductor industry powers high performance computing as well as innovations such as augmented reality and intelligent vehicles.

Commanding market share.

Taiwan Semiconductor Manufacturing Co. commanded over 55% of global foundry semiconductor market share in 2021.¹

Onshoring isn’t quick.

Despite talk of onshoring capacity in the US, the Invesco Developing Markets team sees no alternative to Taiwan Semiconductor in the next three to five years.

For some time now, Taiwan Semiconductor Manufacturing Co. (TSMC)² has been the focal point of discussions surrounding the perceived risk of geopolitical conflict in the Taiwan strait. But the Invesco Developing Markets team doesn’t believe that these discussions fully appreciate TSMC’s pivotal role in the entire global technology supply chain.

We believe there is much to be excited about structurally in the semiconductor industry. The growth in high performance computing driven by cloud, artificial intelligence, and edge computing are all helping to further digitize the global economy. In addition, future innovations in augmented reality, other new platforms, and intelligent (ultimately autonomous) vehicles could prove to be transformative to the world and the way we live. These developments will serve consumers globally, but we believe they hold particular promise for the developed world.

TSMC has commanded market share

While it is inherently difficult to predict the timing of inflection points in cycles – particularly against the backdrop of a likely deep global recession – we believe TSMC will remain at the heart of structural growth across the entire tech industry. Its technology leadership and scale of advanced chip manufacturing is incomparable to its only remaining challengers – Samsung Electronics and Intel.³ TSMC commanded over 55% of global foundry semiconductor market share in 2021 as compared to Samsung at 9% and Intel at less than 1%.¹ Within the advanced semiconductor production nodes (7 nanometer or better process technologies), TSMC’s presence is even more dominant at over 90% share with Samsung being the only alternative.¹

We believe a ‘Taiwan discount’ isn’t warranted

Thus far in 2022, the share price performance of TSMC reflects a 47% decline in US dollar terms.⁴ To be sure, cyclicality explains a lot of this. But we believe there is also an element of a “Taiwan discount” given anxieties over geopolitical risks surrounding China’s intentions with regards to Taiwan.  We believe this discount is inappropriate considering that the entirety of global tech is dependent on a functioning semiconductor supply chain out of Taiwan.

Without TSMC’s logic chips, there would be no more iPhone productions, no more powerful graphics for gaming consoles, and drastically reduced demands for ASML’s equipment. Without TSMC’s foundries churning out advanced chips, all of this and more would arguably come to a standstill, or at the very least face draconian supply disruption that would be orders of magnitude worse than the COVID-induced semiconductor shortages the world experienced in late 2020 and 2021. Where would Apple, AMD, or Nvidia⁵ go for chip production over the several years it would take for them to find an alternative source?

Onshoring isn’t a quick answer

Arguments that cite the ability of the US to onshore semiconductor production are logical, but current capabilities and infrastructure pale in comparison to that of TSMC, and we believe that will remain the case for years. Consider Intel, which cannot match TSMC’s leading-edge technology and is rapidly losing share in its core business – impacting profits and cashflow – to AMD and ARM-based processors (both enabled by TSMC). Any expectations that Intel, with its fragile balance sheet, could significantly ramp up production in an effort to address national security concerns in the near to medium term are likely misplaced. Simply put, we see no alternative to TSMC in the next three to five years or even longer.

Perhaps instead, the US should be more deliberate in helping TSMC (and Samsung) generate reasonable returns in the US relative to their home countries and push hard for these industry leaders to build capacity here. TSMC’s founder Morris Chang recently pointed out that it costs 50% more to manufacture chips in the US vs. Taiwan. Some of this economic burden could be alleviated by the CHIPS Act passed in July 2022, which seeks to strengthen domestic semiconductor research, design and manufacturing. This, along with meatier state subsidies, long-duration tax waivers and a focus on one of the largest risks to the industry – talent development – could go a long way to improve US capacity gap and, perhaps, eliminate the Taiwan Discount being applied to TSMC.

Footnotes

• 1Gartner as of June 2022.
• 2Holdings are subject to change and are not buys/sell recommendations. 6.5% for TSMC as of 9/30/22.
• 3Holdings are subject to change and are not buys/sell recommendations. 0% for Intel and Samsung Electronics 2.9% as of 9/30/22.
• 4Bloomberg as of 10/28/2022
• 5Holdings are subject to change and are not buys/sell recommendations. 0% for Apple, Advanced Micro Devices (AMD), or Nvidia as of 9/30/22.

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Originally Posted November 8, 2022

The Taiwan Discount: A Global Burden Unjustly Borne by TSMC by Invesco US

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