You could make an argument that Taiwan Semiconductor (TSM) has become the most important company in the world. Here’s why.
According to Refinitiv (formerly known as Thomson Reuters), there are more than 100,000 listed companies around the world. So choosing which one company is the most important might be seem to be a fool’s errand.
Perhaps a way to begin is to look at just what is at the heart of our technology-centered economy. Right now, it is probably semiconductors.
Semiconductors are crucial and the most strategically important technology because they are the materials and circuitry needed to produce microchips that are the key to everything from smartphones to advanced satellites. You might think of these microchips as the brains inside all advanced technology.
One trillion chips a year are made; one electric vehicle has 3,000 microchips. It is big business. Semiconductor chips sales in 2020 were roughly $450 billion.
Roughly speaking, there are three different types of firms in this key sector.
The first are the chip designers such as Nvidia (NVDA). This is a competitive space with low capital requirements and huge margins. The second are companies that make the equipment that makes the microchips. America leads in both of these areas.
Then comes the actual making of the chips in what is referred to as fabrication plants. One company dominates the production of the higher performance chips critical to advanced technology, with a 56% world market share. It won’t surprise you to learn that it is in an emerging market is Asia. This company is Taiwan Semiconductor (TSM).
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Why Taiwan Semiconductor (TSM) is So Important
The advanced chip-making business, which is extremely capital and talent intensive, has gone through a rapid consolidation as the number of companies produce cutting edge, high-performance chips has been reduced from 25 to 3. Taiwan Semiconductor is the leader, closely followed by Samsung Electronics. As production has expanded in Asia, the U.S. share of chip manufacturing has fallen to 12%, according to a report by the Boston Consulting Group.
Samsung Electronics, building on its existing operations in Austin, is reported to be considering an investment of as much as $17 billion to build a chip-making factory in Arizona, Texas or New York, according to documents and people familiar with the company’s plans.
Samsung is scouting two locations in and around Phoenix, two locations in and near Austin and a large industrial campus in western New York’s Genesee County, according to one of the people involved.
This follows a plan announced in 2020 by chip-making rival Taiwan Semiconductor to build a plant in Arizona. Then there is the recent proposal by Nvidia to buy the British chip-design company Arm Holdings for $40 billion in what would be the largest-ever deal in the industry.
Then there is the question of whether or not Intel (INTC) can climb back into the race after a series of manufacturing stumbles leading to a new CEO taking the helm this month.
Finally, there is the issue of China. China is about two to five years behind the leading chipmakers but is determined to catch up. China is providing at least $100 billion and year in subsidies to the sector and its national champion, the publicly traded Semiconductor Manufacturing International Corporation (SMICY).
Alex Capri of the Hinrich Foundation has zeroed in on a vital techno-rivalry battleground through an excellent report: “Semiconductors at the Heart of the U.S.-China Tech War: How a New Era of Techno-Nationalism is Shaking up Semiconductor Value Chains”.
Understanding the microchip’s intricate and fragile supply chains is important for both policymakers and investors. This report outlines a typical manufacturing and assembly scenario for a semiconductor chip: from research and development in America, base silicon ingots are cut into wafers in Taiwan or Korea, and finally the microchips are imbedded into end products in China.
I recommended Taiwan Semiconductor (TSM) to my Cabot Global Stock Explorer subscribers last year and have increased our position sharply as the company announced it will raise capital expenditures to $28 billion in 2021, a 47% year-over-year increase. The company recently reported record quarterly revenue, up 31% from the same period a year earlier. The company also delivered an impressive return on equity of 31% with operating margins in excess of 40% in its most recent quarter.
My Explorer advisory will follow this dynamic sector closely with new recommendations forthcoming. The stocks in my portfolio currently have an average return of 194%.
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