China-Taiwan & The Semiconductor Market
[October 2023, London]
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Welcome!
Aforementioned in the previous "article", I'm the type of writer to flip-flop between candid and easy going styles. I want my stuff to be readable. My worst nightmare is churning a 30 minute reading piece out that essentially says nothing that everyone didn't already know or at least give an alternative perspective on.
So, for this one, I'm going slightly more candid. Not much more, just a lil' bit. But, I'll aim to give you a basic overview of three things:
Semiconductors: what they are and why they're important.
China and Taiwan: Historic relations and future possibilities and how they'll effect the semiconductor market.
How Bitcoin relates to all this. (I am a crypto fund manager after all)
My overall aim is to explain this all in as little words as a I can in the most basic language possible. Another thing I hate is reading pages of an article and the author uses words like "plethora" to explain multiple options of something - honestly, who are you kidding, you know?
Anyway, lucky you ay. . . Strap yourself in.
First things first, semiconductors.
They're used extensively in almost every electronic circuit. The semiconductor lies between the conductor and insulator. It controls and manages the flow of electric current in electronic equipment and device.
Why are they important? Well, in layman's: they make all your electrical stuff work such as your iPhone. Without them, nothing really works. They play a pivotal part in global trade, the total market revenue is approximately $550bn.
Basically, one of my points is that loads of hedge funds, mutual funds, asset managers, banks all have an interest in buying and holding Semiconductor manufacturing companies i.e., Taiwan Semiconductor Manufacturing Co Ltd. (NYSE:TSM) to the extent that 17.5% of the outstanding shares are held by institutional investors. (CNN Business, 2023)
What's key to remember is that there is a global chip shortage brought on by the onset of covid-19. Which is why people have been buying them like no tomorrow since. The demand for them is almost exponential as technology never stops evolving, the supply however, the global pandemic kind of got on the way and it hasn't recovered since.
The increasing and constant friction between Chinese and Taiwanese relations could have devastating global effects.
Which leads me nicely onto Chinese and Taiwanese foreign relations. (or not so foreign technically)
Now, how do I word this without sounding too ignorant to the actual history. It's actually not overly different to what's happening between Russia and Ukraine or Israel and Palestine.
Essentially, since 1949 Taiwan has been governed independently from China post the civil war between the Chinese Communist Party (CCP) and Republic of China. (ROC) In short, this is because of the Potsdam Declaration signed between the US, U.K. and the ROC offering unconditional surrender of Japan in the second world war and carrying out the Cairo Declaration.
In ultra basic words, it's one jurisdiction in which one group of people believe that the land belongs to them instead of another group of people which currently occupy it, in this case political opponents whereas in Gaza it's religious -- obviously, the geopolitical situation and history is much more complex but I'm paraphrasing for ease of reading. If you want to have a chat about that in-depth, call me.
China invading Taiwan would lead to the halt of the production of normal and advanced semiconductor chips. I don't think the severity on the situation is truly realised until you understand Taiwan *almost* has a total monopoly on the semiconductor industry. They produce 60% of the world's normal semiconductors and 90% of the advanced ones.
But, Adam, who cares? What's so important about the advanced semiconductor market, can't we just make our own? Not quite. Advanced semiconductors don't just aid your iPhone working when you're scrolling TikTok. They're vital components in advanced weapons systems i.e., satellites, UAVs, stealth jets, advanced AI missiles and bombs, hypersonic weapons and electronic warfare (EW) systems. Basically, this is close to the biggest quandary we've had since Germany invaded Poland in 1939 and on a global scale not just in Europe or the Middle East.
Let's have a scenario where say China successful invades Taiwan, what does the world look like for us? Limited access to those chips leaves us all but defenceless against probably the most advanced force the world would have ever seen. Like fighting Prime Iron Mike with your hands tied behind your back. You will lose. Quickly. It'll hurt too.
Not to mention, Xi Jinping's vow for the "Made in China 2025" and "Full Modern Army by 2027" programs. Still, at least he's not friends with Putin. (oh...)
I thought I'd highlight an article that I read a New York Times written by Alex Travelli (shoutout to you, Alex) a few weeks ago that Prime Minister Modi in India will try and make them a chip making superpower to reduce the reliance on China. The article described Modi's vision as "an ambition as unlikely as it is bold." Probably a pretty spot on overview. I've attached the article in the sources for any of you to read at your leisure.
As my father would say, this is where Bitcoin Barry (that's me) comes into play. Now, let's play a quick game:
(a) What does Bitcoin need to be mined? Computer power.
(b) What are is key component for computers? Semiconductors.
(c) What don't you have without semiconductors? You don't have a working CPU.
(d) What don't you have without a CPU? Bitcoin mining abilities.
(e) What do you have when you don't have Bitcoin? US Dollars or other fiat currency.
(f) What do you have with fiat currency. Nothing.
You get my drift here.
It is paramount that the rest of the world (or basically America) does one of two things: 1) Diversify away from Taiwanese semiconductors and or; 2) Make a geopolitical statement deterring China invading Taiwan. Sadly, for me, the US has the weakest political administration for a number of years, based on both on their actions on social policies and foreign affairs, the current world superpower, the United States essentially can't afford to help fight two foreign wars, let alone a third one 7,000 miles away.
This could have a direct negative effect on the crypto asset sector from a sentiment and logistical perspective. Without the the proper CPU/GPU power, infrastructure and mining facilities with chip reserves available, where will miners go? China? I'm sure you've noticed they're not particularly positive when it comes to crypto. Perhaps becoming obsolete? More likely than the former.
Those of which are there to be discussed in another article at some point. (Sorry to all you Bitcoin hardos out there)
I'm going to go and lay down in a dark room and take a beta-blocker now. Hopefully it was food for thought for you.
Thanks.
AB.
Sources:
New York Times, India Chip Superpower, 2023 (https://www.nytimes.com/2023/09/13/business/india-semiconductors.html)
Semiconductors Worldwide Revenue by Segment , Statista, 2023. (https://www.statista.com/outlook/tmo/semiconductors/worldwide)
Taiwan extends two-year rise in chip exports to US despite downturn, Bloomberg, 2023, (https://www.bloomberg.com/news/articles/2023-06-11/taiwan-extends-two-year-rise-in-us-chip-exports-despite-downturn)
History, Government Portal of the Republic of China (Taiwan), 2023, (https://www.taiwan.gov.tw/content_3.php#:~:text=The%20ROC%20government%20relocated%20to,rule%20of%20a%20different%20government.)
Xi Jinping hails 'deep friendship with Vladimir Putin as leaders meet in Beijing, Financial Times, 2023, (https://www.ft.com/content/fd028975-462e-4b70-912e-3e1e441517e5)
China vows to build 'fully modern army by 2027', South China Morning Post, 2020, (https://www.scmp.com/news/china/politics/article/3107686/policy-meeting-ends-defiant-note-chinese-leadership-insists)
Is 'Made in China' a threat to global trade?, Council on Foreign Relations, 2023, (https://www.scmp.com/news/china/politics/article/3107686/policy-meeting-ends-defiant-note-chinese-leadership-insists)
Crypto is illegal in China. Binance does $90bn of business there anyway, The Wall Street Journal, 2023, (https://www.wsj.com/articles/crypto-is-illegal-in-china-binance-does-90-billion-of-business-there-anyway-2a0af975)
The microchip industry would implode if China invaded Taiwan, and it would affect everyone, The Conversation & King's College London, 2023, (https://theconversation.com/the-microchip-industry-would-implode-if-china-invaded-taiwan-and-it-would-affect-everyone-206335#:~:text=A%20Taiwanese%20invasion%20would%20mean,semiconductor%20capabilities%20at%20the%20core.)
Institutional Shareholders List Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM), CNN Business, 2023, (https://money.cnn.com/quote/shareholders/shareholders.html?symb=TSM&subView=institutional)
"Hardo", Urban Dictionary, 2023, (https://www.urbandictionary.com/define.php?term=Hardo)
