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BUSINESS TODAY 24 November 2022

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5.12.19 12 Shaun Frendo Shaun Frendo is a Research Analyst at Calamatta Cuschieri OPINION 24.11.2022 The semiconductor industry woes due to geopolitical issues 75 years after the transistor was in- vented, the world is experiencing rapid growth in computing power year on year. However, the semicon- ductor industry is currently at the centre of Washington-Tai- pei geopolitical issues due to supply chain disputes between China and the US. Taiwan is determined to keep as much of the industry as it can but this is not con- gruent with the US's strate- gic goals. Washington fears that China could potentially dominate the supply chain and leave the US locked out of essential microelectronics should further military ten- sion between the two coun- tries arise. This, in turn, is because the global semicon- ductor industry is mainly led by Taiwan, which has a deci- sive lead in the sector thanks to companies like TSMC. Founded 35 years ago, TSMC has become a giant with an effective hold on the global semiconductor-chip market. However, TSMC is different from peers such as Intel and Samsung as it finds itself at the forefront of the in- dustry. To this effect, TSMC's has fostered a new trend of fabless chip companies like Nvidia and AMD. TSMC is attracting big customers like Google and Tesla, and has commitments with Apple, In- tel, AMD, and several other buyers of their products. Due to the sheer efficiency of their model, most chip- makers outsource fabrication to TSMC. In fact, Taiwan now accounts for 20 per cent of global wafer fabrication, making it the largest concen- tration in any given country. This makes up 92 per cent of capacity for the most ad- vanced chips in production today. TSMC is also the ex- clusive manufacturer of chips used to make iPhones, mak- ing Apple's production con- tingent on whatever happens in Taiwan. Meanwhile, Intel has laid out the ambitious goal of match- ing TSMC's process technolo- gy by 2024 and overtaking it a year later—although the con- tinuing drop in its share price shows Wall Street's skepti- cism about Intel's ability to fix its previous missteps and catch up with TSMC's tech- nology advances by that time. On a global front, the US has stepped up competition with China's economy by in- troducing restrictive controls that block exports of some chip manufacturing equip- ment. This has had a nega- tive impact on sales of certain semiconductors to the coun- try. China's threats against Taiwan have intensified over the past two years, which raises concerns about escala- tion that would lead to per- manently cutting off or even destroying chip supplies. Washington seeks to reduce Beijing-sourced semiconduc- tors and reduce its own de- pendency on Taiwan for chip supplies. Washington is also pushing to diversify chip man- ufacturing away from Taiwan as this is more relevant now that the chip shortage—trig- gered by disruptions during the pandemic—is becoming more of an issue for manu- facturers. Other countries are making similar efforts. To rebuild semiconductor manufacturing capacity, a $20-billion chip fab is being built in Ohio as part of an ef- fort to address the fact that the US share in global chip manu- facturing went down from 37 per cent in 1990 to 12 per cent in 2020. Another fab built in Arizona is scheduled to start mass production in 2024. But the plants have neither the scale nor the technological level of TSMC's newest fabs in Taiwan. In addition, Sam- sung's yield problem is also causing it trouble in attracting big customers for cutting-edge chip production. In short, competition be- tween the US and China over the semi-conductor supply chain is both causal and re- lated to underlying risks of military conflict over Taiwan, the country in which TSMC is based. However, TSMC is at least partly protected from such geopolitical tensions be- cause it provides an integral product to both sides of the conflict and serves many cus- tomers globally. Undoubtedly, from an investment point of view, TSMC is trading at at- tractive levels and would fit in nicely in a well-diversified portfolio. Disclaimer: The article is issued by Calamatta Cuschie- ri Investment Services Ltd, which is licensed to conduct investment services busi- ness under the Investments Services Act by the MFSA and is also registered as a Tied In- surance Intermediary under the Insurance Distribution Act 2018. The information, view and opinions provided in this ar- ticle are being provided solely for educational and informa- tional purposes and should not be construed as invest- ment advice, advice concern- ing particular investments or investment decisions, or tax or legal advice. For more information visit A confluence of problems led to the semiconductor chip shortage

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