Semiconductors market face off cold war. Intel face off implosion? 📱

1:02 PM September 22, 2022

Intel is recognized as a forerunner in the technological evolution of California's Silicon Valley and a leading manufacturer of processors and graphics chips that made building computers, laptops and smartphones possible. The company resisted the diversion of semiconductor production to Asia for many years and was seen as the flagship American semiconductor manufacturer. 

It is semiconductors, used on a massive scale in almost every device, that are to the technology market the equivalent of oil to the car market or uranium to the nuclear power plant market. They are irreplaceable and critically needed, and today they are the epicenter of conflict for the world's two largest economies. 

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Is the chip market in danger of imploding?

The chip problems were heralded by the pandemic, when chipmakers cut production capacity through lockdowns and a slowdown in consumption in anticipation of a slowdown after which they were unable to cover the surge in demand for the devices, which was caused by, among other things, the trend of remote work, the popularity of virtual entertainment and a temporary boom in orders in the economy indirectly caused by low interest rates, imprudent fiscal policies of governments and simply by the substantial reserves of unspent cash by consumers during the pandemic. Automakers began to complain about lengthening semiconductor deadlines due to the previous 'just in time' ordering policy aimed at reducing the creation of unnecessary reserves. The market was hit by a wave of fires in key infrastructure. Among those that burned down were ASL's factory producing chips in 3nm and 5nm technology near Berlin, Nittobo's Japanese factory supplying fiberglass for processors, Asahi Kasei Microdevices' sensor factory and also the Japanese factory of Renaissance Electronics Corp. which was one of the world's largest producers of microprocessors for the automotive industry. All of this translated into key shortages, downtime and extended delivery wait times. In 2022, it appeared that it didn't stop there as China began its game with the Americans blocking the Middle Kingdom's potential.

A theoretical war between China and the United States over Taiwan, during which the island's infrastructure would be destroyed, would result in an implosion of the semiconductor market from which Western technology companies like Intel, AMD but also chip buyers like Apple and Tesla would suffer the most (since China is practically already disconnected from Taiwan's supply chains). The Pentagon has repeatedly referred to the likelihood of such a conflict. Recently it even did so with CIA Director William J.Burns indicating that Chinese appetite for subjugating Taiwan will increase as the current decade progresses. The stock market is pricing in a pessimistic future for chipmakers today. With the global recession and geopolitical friction between Beijing and Washington, collapse seems more likely today than ever before. The United States, however, is clearly not about to let go and is pointing to increased cooperation and a greater presence on the island. 

The U.S. has realized too late that it needs domestic semiconductor production more than ever because Taiwan is still an uncertain place. The advancing globalization of the past decades has allowed Americans to forget that for a while. Faced with a shortage of chips for navigation, engines and electronics, automakers stand to lose about $20 billion this year. According to Deutsche Bank analysts, the global "technology cold war" will cost the world more than $3.5 trillion over the next five years alone. It could also involve up to a 4% drop in the GDP of economies such as China, South Korea and European Union countries. Allowing China to control Taiwan would herald Chinese dominance and monopoly in the chip market which in practice would mean a powerful Chinese leverage over the global economy and US technology manufacturers. The industrial infrastructure of Taiwan's precision manufacturing market is so powerful that the world would likely have to wait more than a decade to rebuild its capabilities. The U.S. is working on a land lease bill for allied Taiwan that would help the island lease military equipment from the Americans on proposed 10-year repayment terms.  The chipmaker market is seeing a massive slowdown in the face of a possible global recession, which, surrounded by high inflation, interest rates and rising production costs, could herald the destruction of demand for new technologies. Source: Bloomberg

What's the deal with Taiwan?

A Taiwanese company, Taiwan Semiconductors is responsible for about 65% of the world's total semiconductor production and 90% of the production of their latest generation models. Nearly 60% of global semiconductor revenues are consolidated in Taiwan. With the capacity to scale chip production in 5 nm and smaller chips, Taiwan has proven to be a pilgrimage site for technology giants. Due to the trend of stuffing semiconductors into the smallest, most efficient chips possible, and access to cheaper and efficient Taiwanese labor, U.S. companies have been eager to redirect production by focusing on design and intellectual property. It was thanks in part to cheap manufacturing in Taiwan that giants like Intel, AMD and Apple were able to earn higher margins on product sales. Because of its massive manufacturing capacity, Taiwan has become the global epicenter of geopolitical friction. The semiconductor business is extremely difficult. It takes as long as 2 years to build a semiconductor factory (with current shortages, it can take longer), and due to the enormous costs and coordination of supply chains, the cost of the investment is not recouped until another 5 years. The PRC considers Taiwan an integral part of its own territory causing further problems in supply chains and threatening to close the Taiwan Strait, the world's most traveled freight route. With this, the Middle Kingdom is holding back globalization and hitting the business model of companies like Intel and AMD.

Currently, China's semiconductor production accounts for only 5% of global demand with products that still usually mimic Western technology ineptly. For example, manufacturers from the European Union still hold twice China's 10% share of the global chip market. The Middle Kingdom, however, does not want to meekly accept a position of dependence. In 2020, China spent $350 billion on semiconductor imports, an amount that exceeded spending on oil imports. The Chinese are working on an alternative method of producing third-generation chips by mixing gallium nitride with silicon carbide, which could potentially involve easier production scaling and chip performance. By 2025, Chinese spending on technological advances could reach as much as $1.5 trillion, with the lion's share of that going to the semiconductor market. By 2025, China also plans to increase domestic production enough to completely cover its own needs.

Meanwhile, Taiwan has recognized that through geopolitical friction, 'bottlenecks' in supply chains, and the countries' narrative of scaling its own production capacity, its role as a monopolist may diminish over time. The European Union, which aims to hold a 20% share of the global chip market by 2030, has also decided to expand its semiconductor production capacity.  Therefore, the Taiwanese, teasing nearby China all the more, plan to consolidate production at home by encouraging talented specialists to immigrate and supporting domestic companies that build technology to enable production scaling. 

However, TSMC CEO Mark Liu has in the past stressed that Taiwan is still not capable of manufacturing on its own and relies on technologies designed mainly in the US. For Taiwan, of course, cooperation with the US comes at a price. Through pressure from the Americans during Donald Trump's presidency, TSMC bowed to threats to withdraw U.S. contracts and halt intellectual property transfers and blocked exports for Huawei, losing billions of dollars in profit and a regular customer. Signals of U.S. export controls were already flowing in 2015 when the United States blocked exports of Intel's Xeon and Xeon Phi chips to the Middle Kingdom. Korea's Samsung, which has a 16% share of global semiconductor revenue, is also feeling similar US pressure.

China's dragon not breathing fire?

The largest importer of Taiwanese chips to date was, of course, China. Today, exports to China have deteriorated, and China itself, in addition to a deep economic crisis, is threatened by technological collapse. The chip factories of the Middle Kingdom are capable of producing chips in 14 nm technology which allows them to be installed in washing machines, dishwashers and cars but not in laptops or smartphones. At the same time, the US is blocking Chinese imports by pressuring manufacturers not to sell components to China. 

In the past, China has experimented with advanced chip manufacturing but has not had success in this field. Large companies like SMIC still haven't caught up to the demands of new technologies, and according to analysts, they are 5 to 6 years behind Taiwan's precision industry. In 2019, the high-profile debut of Hongxin Semiconductor Manufacturing added fuel to the fire. The Wuhan-based company spent nearly $20 billion in investment, received state subsidies and committed to producing 30,000 semiconductors. However, it went bankrupt in 2020 without delivering a single one. China is burdened by a lack of intellectual property, and the current economic environment is not conducive to technological development and free trade. China had been the world's largest customer in the chip market for previous years with what it probably prepared for in case Taiwan's supply chains were cut off.

Problems with the PC market

As if that weren't enough, U.S. semiconductor manufacturers AMD and Intel have admitted that demand for desktop computers is deteriorating. The problem is that the rate of decelerating demand is higher than both companies assumed in pessimistic forecasts this summer. Bernstein semiconductor market analyst Stacy Rasgon released a report on a meeting with executives from both major US manufacturers.  Intel's CFO David Zinsner indicated that demand for computers had deteriorated even more than indicated by estimates, which called for a 10% year-on-year decline. It was this forecast that the company made during the earnings season in July that deepened the stock sell-off. Zinser stressed that the reasons for the market's weakening are mainly lower sales in China and the difficult macroeconomic environment through which demand for new technologies is slowing down. However, the director was not tempted to update the forecast.  Recall that as recently as April, Intel forecast a rebound in the PC market, in the second half of the year, which it retreated from after Q2 results. According to IDC Technologies estimates, worldwide PC shipments have fallen by 15%, as of 2021. 

Analyst Bernstein also met with Dan McNamara, director of AMD's business division. McNamara also confirmed that current PC demand is declining and that growth prospects are even weaker than expected.  AMD optimistically projected a 1.5% drop in demand for personal computer components last year. The chipmaker's director revealed that the decline will be larger. Looking at Intel, the situation should come as no surprise. Both companies, with one voice, say that the PC market is even weaker than their already 'pessimistic' expectations assumed. 

Success at all costs

Despite the turmoil in the global market, Intel has indicated a date for the release of its 13th generation 'Raptor Lake' processor chip, which has been announced for nearly 2 years. The presentation will take place on 27 Septemner, as part of the 'Intel Innovation' conference, which will be kicked off by the company's CEO, Pat Glesinger. The chip, which is being developed by Intel together with Taiwan's MSI as a result of power overclocking, reached 8GHz against the base 6GHz and broke a world record among processors. However, the price of the new-generation units may be as much as $140 higher than the previous one (estimates put it at around $550), leaving the question of demand in the face of the economic downturn still open. With the launch, however, Intel confirmed its ability to deliver the most technologically efficient units by surpassing the power of AMD's rival Ryzen 7000 series. Recently, Intel's business was also dealt a massive blow by Apple, which abandoned the company's products and switched its semiconductor supplier to the UK-based manufacturer ARM, which was acquired by Apple in 2020 for $40 billion. The company is now beginning to compete with Apple in the minicomputer market, and has released an NUC 12 Enthusiast model equipped with its own state-of-the-art components, priced at twice the price of a Mac Studio from the 'company with an apple'. However, this probably won't be enough to stave off a period of turmoil in the chip market.

The deteriorating desktop market and problems with export restrictions to China, which has been the largest chip importer to date, are obviously losing out on the shares of Advanced Micro Devices (AMD.US) Micron Technology (MU.US) and Taiwan Semiconductor (TSMC.US)Intel (INTC.US) shares, W1 interval. The company's shares reversed a multi-year uptrend in 2022, and the price in January fell sharply below the 200-session moving average, which had been the lower limit of declines for more than a decade. Buying shares at the 200-session average has proven to be a great investment decision every time. This time, supply did not give up and the uncertainty and turmoil in the semiconductor market, which we have seen de facto since 2020, caused a permanent weakening of Intel's valuation. The vision of a conflict in the Taiwan Strait and hampering demand for devices hit the company's profitability. The valuation is losing 65% from its 2020 price peaks. RSI found itself at oversold levels not seen in nearly 14 years. Let's remember that such huge sell-offs in the case of Intel have already occurred, among others, when the dot-com bubble burst in 2000 and during the 2008-2009 crisis. So far, each time the company has been able to recover from the tough situation and regain margins, which is indirectly related to the US dominance in the new technology market. Despite the difficult economic conditions, Intel on September 16 announced a dividend to shareholders of $0.365 per share quarterly, which will translate into $1.36 on an annualized basis. At the current valuation of the stock, the dividend is about 2.5% of its value. Source: xStation5

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