The economic significance of tension over Taiwan … the U.S. government is likely to throw billions at the problem … a forgotten blue chip from yesteryear rising again

 

If the Taiwanese authorities, emboldened by the United States, keep going down the road for independence, it most likely will involve China and the United States, the two big countries, in a military conflict.

That comes from Qin Gang, the Chinese ambassador to Washington. He made the comment last July in an interview with NPR.

More recently, in November, President Xi Jinping told President Biden that any nation advocating for the independence of Taiwan was “playing with fire.”

Xi went on to say “The historical task of the complete reunification of the motherland must be fulfilled, and will definitely be fulfilled.”

And this comes from Nikkei Asia:

Chinese President Xi Jinping will employ force to unify Taiwan with China by 2027, an influential Chinese academic who advises Beijing on foreign policy told Nikkei.

Keep in mind, the Chinese have been flying dozens of fighter jets into Taiwan’s air defense identification zone. This past Sunday, 39 fighters moved into Taiwanese air space.

***Obviously, no one wants conflict with the Chinese. But beyond that, why is this so significant?

Well, here’s a percentage for you. Take a guess what it represents…

92%.

Ready?

From Taipei Times:

Taiwan accounts for 92 percent of the world’s most advanced semiconductor manufacturing capacity, a report from Boston Consulting and the Semiconductor Industry Association said in April. South Korea holds the remaining 8 percent…

In dominating the fabrication of the world’s most advanced semiconductors, Taiwan Semiconductor Manufacturing Co (TSMC) has captured a technology that is crucial to the cutting-edge digital devices and weapons of today and tomorrow. TSMC accounts for more than 90 percent of global output of these chips, according to industry estimates.

Both superpowers (U.S. and China) find themselves deeply dependent on the island country at the center of their increasingly tense rivalry.

***The critical importance of semiconductors

To make sure we’re all on the same page, semiconductors are materials that can conduct electricity under certain conditions. This makes them great mediums for controlling electric currents. And that makes them a critical component of virtually every electronic device with an on/off switch.

Basically, semiconductors are a “must have” in any technology product. Our world would be unrecognizable today without them.

From Electrochem:

Without transistors and integrated circuits made of semiconductors, much of modern life would be very different.

No hand-held electronic games would entertain children for hours.

No bar-code readers would speed checkout lines and compile inventories at the same time.

And no computers would handle tasks at work and home, nor would microprocessors control the operations of cars, planes, and space vehicles.

You’ve likely read about the semiconductor shortage that’s plaguing manufacturers today. You may have even experienced the results of such a shortage.

I upgraded my iPhone last fall and had to wait weeks for a new one to become available. That was due to lack of inventory thanks to this chip shortage.

Experts suggest we’ll be dealing with this supply chain shortage until late this year, possibly beyond.

***But it’s not just impacting phone manufacturers, it’s the entire economy

From CBS News:

Supply chain shortages have hit virtually every industry, but it’s the microchip shortage that’s having the biggest impact. Experts estimate the global chip shortage cost the U.S. economy $240 billion in 2021. 

Some U.S. manufacturers have less than five days’ worth of inventory, according to the Commerce Department. 

The situation has deteriorated so much that the government is getting into the mix.

Last week, the House of Representatives debuted the “America Competes Act,” a bill intended to boost U.S. semiconductor manufacturing and competition with China. It includes $52 billion to support domestic chip research and production.

From House Speaker Nancy Pelosi:

The House legislation will supercharge our investment in CHIPS, advance manufacturing at home, strengthen our supply chain, transform our research capacity and advance our competitiveness and leadership abroad.

All of this spells “opportunity” for investors who connect the dots.

We have a product that’s needed throughout the entire global economy… bullish

We’re already suffering from a product shortage… bullish.

We have significant geopolitical reason to support non-Taiwanese chipmakers… selectively bullish.

And now, we have the U.S. government looking to throw money at domestic production… selectively bullish.

So, which companies fit the bill?

Well, one is Intel.

***A few weeks ago, the chipmaker announced it will build a $20 billion chip plant in Ohio

For more on Intel’s production plans, let’s turn to macro expert, Eric Fry, editor of Investment Report:

Historically, Intel has only manufactured in-house chips of its own design.

But Intel CEO Pat Gelsinger now plans to build factories that make chips for other “fabless” companies, including high-profile semiconductor designers like QUALCOMM Inc. (QCOM), NVIDIA, and Apple Inc. (AAPL).

To deliver this vision, Intel is establishing a new standalone business unit called Intel Foundry Services (IFS).

This sweeping, forward-looking strategic plan won’t come cheap; Intel is set to enter a heavy CAPEX-spending cycle that would boost annual spending from $16 billion to more than $25 billion.

The price of Intel’s “era of innovation” is high because the company intends to build several multibillion-dollar, state-of-the-art facilities in both the U.S. and Europe.

Intel’s stock has had a rough go over the last year.

Below, you can see it falling 12%. Plus, I suspect your eye will be drawn to the knife-edge fall here in 2022.

Behind this decline was Intel’s latest earnings report.

The company easily topped Wall Street estimates, but it suffered a 7% drop in revenues from its client computing division. That’s Intel’s traditional PC group, its largest business unit.

Wall Street also dinged the stock because there are signs that the PC boom, the company’s biggest tailwind for years, is coming to an end.

It appears that analysts are still looking at Intel as a PC-chip company from yesteryear, unable to see it transforming into tomorrow’s next-gen chip company.

***To get a feel for the extent to which investors have bailed on Intel, let’s compare it to SMH, which is the VanEck Vectors Semiconductor ETF

It holds heavyweights including Taiwan Semiconductor, Nvidia, Broadcom, Qualcomm – even Intel.

In fact, that’s what’s amazing. Even with holding Intel as its fifth largest holding, SMH’s two-year returns dominate those of Intel.

The chart below shows this. If you can’t see it, while Intel is down 23%, SMH is up 94%.

But Intel’s new focus, as well as growing tension over Taiwan, spells opportunity.

Eric has done tremendous research on Intel. To access it as an Investment Report subscriber, click here.

Pulling back more broadly, keep your eye on Taiwan. Both China and the U.S. desperately need access to this key economically strategic resource.

While that increases the risk of conflict, it also increases the likelihood of strong returns for investors who position themselves wisely.

Have a good evening,

Jeff Remsburg