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Taiwan may account for just 1 percent of the global GDP but if it shuts shop, the cascading effect could be disastrous for world economies, stock market veteran Basant Maheshwari has warned amid sabre rattling by China.
Announcing the latest BM Vision 2030 smallcase for investors, Maheshwari tweeted on August 21 an extract from his report that highlights the role played by the island in the global supply chain.
China has continued war games and military drills around the island following US House Speaker Nancy Pelosi’s visit to Taipei at the beginning of the month that infuriated Beijing, which claims Taiwan as its territory.
‘Kya Lagta Hai -12’ was sent today to all our PMS members and the ‘BM Vision 2030 smallcase’ investors.
Extract:
‘Taiwan is only 1% of the global GDP but if it shuts down its shop the damage could be a complete global recession.’https://t.co/6ctAbLJggY
— Basant Maheshwari (@BMTheEquityDesk) August 21, 2022
Maheshwari’s statement shines the light on the dominace of Taiwan in semiconductor and other manufacturing businesses and comes at a time when the island is making moves to insulate these enterprises from China’s influence.
Also Read | Taiwan may unwind a $ 800 million chip deal with Chinese company
What’s the conflict?
There has been a dramatic escalation of tensions in the region after Pelosi visited Taipei on August 2. A furious China slapped a series of bans on agricultural exports in addition to conducting unprecedented military drills off the island.
World leader in chip-making
While China and the US produce just about 5 percent each of the world’s chips, Taiwan accounts for 65 percent of the global supply of semiconductors, which are at the heart of all electronic devices—from toys to cars. When it comes to advanced chips, Taiwan makes 90 percent of them.
The island’s $ 127-billon chip industry is home to Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest chip foundry with a market share of 53.6 percent in the first quarter of 2022.
At the end of June, the inventory of TSMC, valued at $ 454 billion, was equal to 40 percent of that quarter’s revenue. Its rivals collectively had a figure of 57 percent.
Also Read | Chipmakers are flashing more warnings on the global economy
Counter-measures in place
Even as the Chinese military postures off its coast, Taiwan is beefing up its semiconductor defences. Taiwanese officials may force Foxconn, formally known as Hon Hai Precision, to unwind an $ 800 million deal with China’s erstwhile chip champion Tsinghua Unigroup.
The world’s largest contract electronics maker raised eyebrows in July when it revealed it owned 20 percent of Tsinghua Unigroup through a mainland subsidiary. Foxconn has promised to follow the law while stating that the tie-up has been misunderstood.
But Taiwan’s investment commission, which reviews large deals in China, was irate, and authorities were considering fining it up to T$ 25 million, $ 836,000, for failing to secure necessary approvals, a Reuters report said.
Taiwan is also making moves to protect its top engineers from mainland corporate poachers. A 2019 study revealed some 3,000 chip engineers, or 10 percent of the island’s total supply, have been poached by Chinese companies since 2015.
On top of strict investment curbs, Taiwanese companies are banned from offshoring advanced chip-making to the mainland. But the fact remains that many global chip majors produce in China.
TSMC has a plant in Nanjing that makes 16 nm (nanometre) and 28 nm chips. Other leaders such as Samsung, SK Hynix, Intel and Micron also have a strong presence on the mainland.
A silver lining is that few major chipmakers produce their most cutting-edge products in China. China and the US are still dependent on Taiwan for both high-end and basic chips.
Also Read | The Eastern Window: A semiconductor crisis in the offing?
Why is this uncertainty bad for global markets?
Mounting concern over semiconductor demand is sending shudders through North Asia’s high-tech exporters, which historically served as a bellwether for the international economy.
South Korean behemoths Samsung Electronics Co and SK Hynix Inc have signalled plans to dial back investment outlays, while across the East China Sea, TSMC has indicated a similar expectation.
Semiconductor stockpiles are at a record high, and a global economic downturn is unlikely to change that picture. But an increasingly tense geopolitical environment and continued supply-chain friction are dividing the largest from other semiconductor manufacturers, which could impact how well they survive.
The “technology cold war” between the US and China that gained steam under the Trump administration and was exacerbated by the coronavirus pandemic has reset expectations for how much product should be kept on the shelves.
While TSMC and Samsung, the industry leaders, are enjoying more robust outlooks for their foundry services because they can offer clients superior manufacturing processes for higher-end applications like AI and 5G mobile communications.
Yet investors remain unconvinced that all this spending will support earnings. Most foundry stocks have declined over the past year, even with continued double-digit revenue growth, in large part because the high rate of spending on new facilities heightens concerns that capacity will outstrip demand if a global recession hits, a Bloomberg report said.
WATCH: Explained | Why India-Taiwan agreement could be a game-changer for semiconductor industry
Can’t afford another round of shortages
The world has had a taste of similar conditions which resulted in a global chip shortage that hit various industries hard during the COVID-19 pandemic and the volley of US-China cross sanctions during the Trump era.
Kanishka Chauhan, principal research analyst at Gartner, warned that the semiconductor shortage would severely disrupt the supply chain and constrain the production of many electronic equipment types.
As expected, automobile production took a hit, with some domestic and global automobile manufacturers cutting output or even temporarily halting production due to the semiconductor shortage.
According to data from the Society of Indian Automobile Manufacturers (SIAM), automobile wholesales in India declined 11 percent year-on-year in August 2021.
Production of laptops, tablets, smartphones and other electronic devices, too, was hit.
Expertspeak
In July, Gartner warned that global chip sales will hit major resistance in 2022 and may even contract in 2023. The firm projected single-digit chip sales growth of 7.4 percent in 2022, down sharply from 26.3 percent in 2021.
“Although chip shortages are abating, the global semiconductor market is entering a period of weakness, which will persist through 2023 when semiconductor revenue is projected to decline 2.5 percent,” said Richard Gordon, Practice VP at Gartner.
“We are already seeing weakness in semiconductor end markets, especially those exposed to consumer spending. Rising inflation, taxes and interest rates, together with higher energy and fuel costs, are putting pressure on consumer disposable income. This is affecting spending on electronic products such as PCs and smartphones,” Gordon added.
Fearing that the world economy could continue to deteriorate, the 2022 projection for semiconductor revenue has decreased by $ 36.7 billion to $ 639.2 billion. For 2023, Gartner expects chip revenue to further contract to $ 623.1 billion.
Following the pandemic-induced surge in 2020 and 2021, PC shipments are now projected to fall by 13.1 percent in 2022. Smartphone-related revenue from semiconductors is also expected to grow at a slower rate in 2022—3.1 percent as opposed to 24.5 percent in 2021.
On the domestic front, investors are optimistic but the China-Taiwan tension looms.
Manish Sonthalia of Motilal Oswal AMC believes that in all likelihood, 20,000 on the Nifty would come sooner than the next Independence Day, probably before calendar year-end 2022.
“The only caveat is China and Taiwan should not begin a war, “he said, adding foreign institutional investors (FIIs) have started re-entering the Indian markets with baby steps, which will be a sprint by October 2022.
(With inputs from agencies)
