Is the most important company in the modern world at risk?
In a rather uncharacteristic move, Warren Buffett, the oracle of Omaha, sold out nearly 90% of his position in TSMC earlier this week, less than 3 quarters after he had entered the position. He quoted geopolitical tensions as one of the factors for his decision.
But what is TSMC, and why should we care? To understand this, it helps to understand the semi-supply chain in some detail.
While semiconductors as a sector may look intimidating - its actually quite simple when you break it down.
There are three main functions
1.Design
2. Fabrication
3. Assembly & Testing
And two support functions
1.Critical Equipment Suppliers
2. Chemical Suppliers
To understand which parts of this value chain we would be most interested in, we need to understand Moore's law which was an observation that the density of an integrated circuit doubled every two years.
While there have been discussions over how Moore's law could pan out given the physical constraints like quantum tunneling that begin to impact below the 5nm range, the structural move towards smaller nodes helps two parts of the value chain disproportionately- Fabs & Lithography
TSMC is the undisputed market leader in the fabs market with a 55% market share Its chips power everything from high performance data centers, consumer appliances, vehicles and even your smartphone!
More importantly, it is one of the only two companies in the world that is working on 5nm and 7nm tech - a race in which companies like Global foundries and UMC have bowed out. By some estimates it had a whopping 90% market share in the sub 7nm segment!
It has as its customers almost all of the leading semi-conductor companies, including Intel, Apple, Nvidia, AMD, Broadcom, NXP, Qualcomm, Tesla and even the US military!
To put it simply - almost every modern data-center in the world, every cutting edge smartphone, or modern car most likely has a chip that made it through a TSMC fab. Understandably, if anything were to happen to this company, it would be a major risk to the world!
Taiwan, which China believes to be a part of its territory under the One China Principle, has been for long under risk from Chinese attack. More recently, this threat has strengthened, as China simulated a war drill to chalk out an attack on Taiwan.
Taiwan's allies, the US and Japan, in a show of strength also had military jets scramble and placed missile destroyers in the South China Sea.
Understandably, if China were to capture Taiwan, the most prized asset they will gain control over is TSMC - not only the factories and tech, but also the massive engineering brain power that drives the company.
Which brings us to the geopolitical version of the crown jewel defence! Under this strategy, a target company sells of its most important assets to make itself less attractive to the acquirer. In this case the acquirer is China, the target is Taiwan, and the jewel is TSMC!
Luckily, such a crown jewel defence can be executed even without a physical attack on any TSMC facilities as has been shown in US wargaming.
There are two primary modes that the West has considered till now
1. The first is moving all the TSMC engineering talent out of Taiwan at the first signs of an attack
2. The second is an attack on the TSMC supply chain by denying access to lithography equipment from ASML
That being said, the role of this exercise would be simply to deny China access to the crown jewel TSMC, not transfer those capabilities to the US The US is unlikely to be able to replicate the scale & tech of the business, even with the engineering talent present.
Which means that irrespective of how the war games play out, a Chinese attack on Taiwan is likely to halt global semi-conductor supply chains in a big way! How big you ask? - A BB report marks the loss to the global economy at $1tn!
So let's hope and pray it doesn't get to that - because like wars, its unlikely to end well for any of the parties involved!
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