The ‘Semiconductor Science Act’ passed by the US Congress officially came into effect on the 9th (local time) with the signature of President Joe Biden. The key is to provide $52.7 billion in federal grants to invest in semiconductor manufacturing capacity and a 25% tax credit to companies that build semiconductor factories in the United States by 2026. The bill is expected to encourage mid- to long-term investment not only in the US but also by semiconductor companies around the world. However, bad news is emerging on the demand side. Gartner, a market research firm, downgraded its global semiconductor market growth rate this year from 13.6% to 7.4% due to the economic slowdown at the end of last month. It also predicted that sales in the semiconductor market will decline by 2.5% next year as the growth slowdown continues.
Earlier in June, Bank of America predicted that the semiconductor downside cycle, which repeats once every three to four years, would soon begin in earnest. The earnings forecasts of major US semiconductor companies, such as Intel, AMD, Nvidia, and Micron Technology, which received poorer-than-expected second quarter results, were lowered one after another.
The US semiconductor law aims to nurture and strengthen the country’s semiconductor industry, as well as to contain China. The bill stipulates that subsidized companies will be restricted from investing in semiconductor facilities in China for 10 years. The Chip 4 alliance that the US is pushing for is also an extension. Conflicts between the US and China, along with concerns over a slowdown in demand, and rising geopolitical tensions over Taiwan could negatively affect the share price of semiconductor companies. Tensions peaked on the 2nd after US House Speaker Nancy Pelosi’s visit to Taiwan and the Chinese military’s blockade exercise. Although it rebounded the next day, in the New York Stock Exchange on the 2nd, when Chairman Pelosi arrived in Taiwan, the share prices of semiconductor stocks such as Intel, Qualcomm, and Micron fell by 0.7 to 2%, TSMC’s stock price by 2.4%, and Taiwan’s second-largest foundry (contract manufacturing) company UMC by 3%. fell The Philadelphia Semiconductor Index, which consists of 30 major semiconductor stocks listed on the US stock exchange, also fell 1.1%.
According to the Semiconductor Industry Association of America (SIA), Taiwan currently produces more than 90% of the world’s 10nm or less state-of-the-art semiconductors (8% in Korea). It is the eighth largest trading partner of the United States, with bilateral trade amounting to $114 billion. The US trade with China and Taiwan is ten times that of Russia and Ukraine.
The military clash over Taiwan could lead to production halts at TSMC, the world’s largest foundry, as well as US semiconductor companies associated with TSMC, leading to disruptions in the entire supply chain. TSMC’s major customers include Apple, AMD, Qualcomm, Nvidia, Broadcom, and Intel. Currently, in the Philadelphia Semiconductor Index, Nvidia, AMD, and Intel have a high proportion of inclusions in that order. In addition, major US semiconductor companies still depend on the Chinese market for a significant portion of their sales. According to FactSet, a global financial information company, as of last year, the proportion of sales in the Chinese market of major US semiconductor manufacturers was found to be 66% for Qualcomm, 26% for Nvidia, 26% for Intel, and 24% for AMD. Considering that Apple relies on China for about 90% of iPhone production, the conflict between the US and China and the situation in Taiwan are bound to have a big impact on the iPhone manufacturing base.
Recently, investment media, Barron’s, selected US semiconductor stocks that are particularly vulnerable to further escalation of tension because they are directly exposed to changes in Taiwan’s situation. These include Teradyne and Applied Materials, which generate more than 20% of their sales in Taiwan, as well as Lam Research, Micron and Intel. Barrons analyzed that these companies are semiconductor stocks sensitive to the Taiwanese situation in three aspects.
These stocks currently account for at least 15% of Taiwan’s sales and are traded at a leading price-earnings ratio (forward PER) that is several dozen times higher.
Among them, integrated semiconductor companies (IDMs) such as Intel and Micron and foundry companies can directly benefit from the recently passed semiconductor law as the US strengthens chip production in their country. Equipment makers such as Teradyne and Lam Research are expected to benefit indirectly.
However, we should be aware of share price volatility caused by the situation in Taiwan. In June, the BoA downgraded the investment grade for Teradyne from Buy to Neutral, citing the U.S. Federal Reserve’s tightening monetary policy, consumption contraction, and geopolitical instability surrounding Taiwan. Last month, British investment bank Barclays presented a negative outlook for Lam Research, one of the world’s five largest semiconductor equipment makers, saying “an important price rebalancing may come.”
TSMC, with its production lines concentrated in Taiwan, has the most direct influence. TSMC recently decided to set up factories in the US and Japan one after another, but all of the state-of-the-art production lines under 3 nm are being built only in their home countries, such as Tainan and Hsinchu Science Park. TSMC also works closely with Dutch lithography equipment company ASML in the production of advanced semiconductor chips. On the 3rd, Mark Williams, Asia chief at Capital Economist, a British market analysis firm, analyzed in an investment memo that “ASML will withdraw key personnel out of Taiwan before the Taiwan crisis.” Currently, about 10% of ASML’s workforce is working in Taiwan, and if they leave Taiwan, TSMC’s production of cutting-edge chips will inevitably be disrupted.
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