As the White House continues to whack away at Chinese electronics giant Huawei, Taiwan Semiconductor Manufacturing ( (TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report), has emerged as a surprise winner. Here is why.
The US Commerce Department on Monday announced new restrictions on Huawei that further prevent the Chinese firm from acquiring any chips that use American intellectual property, even if they are made by a foreign company.
The punch could hurt Huawei badly, while elevating TSM.
The Taiwanese microprocessor foundry on July 22 confirmed it will suspend all new orders from Huawei. Doing so put TSM in compliance with previous changes to U.S. export regulations. In an industry where very few semiconductor firms fabricate their own chips, TSM’ status as a neutral third party will become more important over time, to the detriment of US chip manufacturers.
To be clear, sides have been chosen.
The Trump administration has made its Huawei strategy explicit: The White House sees the $100 billion Chinese company as an espionage asset of the Chinese government. Administration hard-liners want to kill the company at all costs.
The United States has no control over Huawei’s foreign partners. However, the semiconductor sector is complicated, with many moving parts.
For example, companies like Apple (AAPL) and Huawei design chips in-house, then outsource the fabrication to firms like TSM, which uses tools and services from American firms such as Lam Research ( (LRCX) - Get Lam Research Corporation Report), Applied Materials (AMAT) and KLA Tencor ( (KLAC) - Get KLA Corporation Report) to build manufacturing scale.
Without access to American-made semiconductor equipment, manufacturing at TSM’s foundries would grind to a halt.
The Trump Administration decided to use that leverage. Administration hawks want to control production by altering the Foreign Direct Product Rule, a framework that governs certain foreign-made products based on U.S. intellectual property.
The result would be any firm that uses American-made semiconductor equipment would be required to get prior approval before making products for Huawei.
It’s a draconian and overly complicated idea, but there is some precedent.
When the trade restrictions began in 2019, Huawei was forced to fast-track its vertical integration plans. Its HiSilicon subsidiary began building more of the components required to make its devices run. It contracted with global chip factories for the rest.
The Mate 30, a Huawei’s flagship smartphone, shipped December 2019 with no American-made hardware. While previous generations used flash memory from Micron, LTE antennas from Skyhook and Qorvo, and power supply chips from Broadcom ( (AVGO) - Get Broadcom Inc. Report), the 2019 model featured hardware from Samsung, Toshiba and HiSilicon. In the course of a year, the global market for fabless semiconductors was remade.
TSM dropping Huawei will exacerbates this trend, and disrupts the global supply chain.
Eventually, the suppliers will splinter — one silo for American intellectual property users and another for the rest of the world. Over time, offshore firms will likely gravitate to the second group, as it comes with fewer political entanglements.
On Monday, the Commerce Department added 38 additional Huawei affiliates to the Entities List. American companies are prevented from doing any business with these firms without a license, a measure resigned to close loopholes, according to a report from the Wall Street Journal.
Despite losing Huawei as a customer, TSM has seen shares go on a tear. They surged to a new high in late July after Intel ( (INTC) - Get Intel Corporation Report) managers said the company faces manufacturing delays getting its latest chip designs to market. Company officials even hinted that outsourcing production. In the past, TSM has been the manufacturer of choice for Intel.
Investors were right to bid up shares of TSM. The company is the longer-term beneficiary of the new world order in semiconductors.
American companies, however, are likely to be hurt and the splintering begins.
The major stocks have had a good run. However, the current share prices likely do not reflect the inherent political risks for the sector.