Taiwan — The disputed jewel among the world´s leading powers
US-Chinese relations have been heating up progressively. Amidst this turbulence, Taiwan emerges as a highly contested asset. Is there a valuable gem hiding in this small island?
On April 16th, Mr Biden had his first meeting with a foreign visitor, Japan´s Prime Minister, Mr Yoshihide Suga. A statement was issued on the back of the meeting in which “the importance of peace and stability across the Taiwan State” was highlighted. Meanwhile, China conducted several military exercises to the West and East of Taiwan on April 8th, in a move to demonstrate its military superiority over the island.
What is the story behind this island that makes two superpowers shake?
Taiwan has been governed independently of China since 1949, when the Kuomintang (Chinese Nationalist Party), who were the dominant ruling party of mainland China from 1928 to 1949, retreated to Taiwan. The Kuomintang settled as an independent territory while China came under the rule of the current Chinese Communist Party (CCP). Taiwan progressively transitioned into a democratic state, holding its first democratic election in 1996.
Beijing has always viewed the island as part of its territory, it is not a United Nations member and has only been officially recognised as an independent State by a few states (15, as of September 2019).
Relationships with Taiwan at present
Aiming to maintain a peaceful relationship with China, most countries formally support Beijing´s sovereignty over Taiwan, including the US, as it officially considers Taiwan as part of China and does not support its claims for independence.
In practice, relationships with this island tend to be far more ambivalent. The US does hold “enhanced commercial ties“with Taiwan and has granted special prerogatives such as a normal trade relations status, ready access to U.S. markets and export-import bank financing. All resulting in a very close commercial relationship, in which Taiwan has become the US 9th largest trading partner, and the US is Taiwan’s 2nd largest partner.
Why would the US get involved in such a deep love-affair with Taiwan if this could hinder its relationships with China?
Taiwan´s disputed love affair can only be understood in its geographical context, as Taiwan sits 100 miles east of China, separated by the Taiwan Strait, a historically important fishing lane, considered a strategic protective barrier against invasions to mainland China.
A real threat to China’s security if controlled by an outside power, as it could be used to blockade the China Coast and bomb cities and transportation lines.
Taiwan also holds a pivotal role in connecting East and North-East China and as a connecting route to Philippines, Vietnam, the Spratly Islands and Japan.
What economic factors underpin this tension?
It is hard to understand geopolitical tensions without a deep dive on the economic drivers. One word here is key to unravel these tensions: Semiconductors.
Taiwan is the golden jewel for semiconductor manufacturing, accounting for more than 60% of the revenue generated in foundry-semiconductor plants in 2020. Semiconductors are critical components that power electronics from smartphones, laptops, electric vehicles or advanced weaponry and aircrafts. A sector in which demand keeps surging as emerging technologies such as artificial intelligence, quantum computing, Internet of Things or advanced wireless communications all require cutting-edge semiconductor-enabled devices.
A clear champion emerged in this contested arena, Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker and the top supplier for Apple and Alibaba.
The opportunity
Taiwan is a highly disputed territory with a contested diamond that would give a clear competitive advantage to the winner in the current tech race. Going long or short in Taiwan ultimately depends on your views over a contested asset in the geopolitical space.
Will the strong interest from the two global superpowers increase the value of Taiwan and drag-along its companies? If so, long term investments in TSMC and other Taiwan focused funds could make sense.
TSMC, with a market cap of $560bn it is the world`s 11th most valuable company. The firm is at an enviable place with a profit of $20 bn on revenues $48bn and a 30% growth in the microprocessors market share from 9% in 2000 to 39% in 2020, according to The Economist.
Shares won´t come cheap, as the price has been increasing steadily for the past 5 years:
Nevertheless, there are reasons to believe in good long-term growth:
- Forecasted spend of $100 billion through the next 3 years in new capacity (land, factories and equipment) and research and development which could lead to much higher earnings.
- Solid balance sheet and cash flows with a net cash position of $18bn. Its annual operating cash flow should be able to finance its investment plans.
- Can benefit from the short-term shortage caused by the Covid 19 lockdowns and long-term positive growth prospects for this sector.
Could geopolitical tensions play out the other way? Could China and US, downplay Taiwan´s role in semiconductors by promoting their national champions?
China and the US are both trying to counter their heavy reliance on the Taiwan´s semiconductor industry. China is using financial incentives, intellectual property and anti-trust standards to accelerate their development and become a global tech leader. The US, who currently controls 48% of the semiconductor market, tightened its export controls under the Trump Administration towards China. The Biden Administration is likely to pursue strong investments in the semiconductor field in the form of a 2020 National Defense Authorization Act (NDAA) which already passed Congress and the Senate. The NDAA calls for a $15bn in state subsidies and incentives to attract new chip-manufacturing plants to the US.
But will they succeed at playing catch up?
It seems a hard game to play as Chinese players seems to be lagging decades behind and despite the Biden´s revival plan it seems doubtful whether subsides will restore Intel´s old supremacy in this space, according to The Economist. Nevertheless, both China and the US have a solid track record at promoting national champions in the digital arena (Alibaba, Amazon, Google, Tencent…) and ensuring their supremacy. Going short on Taiwan would reinforce confidence that US and/or China will know how to savvily protect their interests in the semiconductor field as well.
Regardless of how you decide to play in this game, something will inevitable be true: Boredom won´t threaten you.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
