It’s understandable why the United States felt the need to act quickly to keep powerful semiconductors out of the hands of the Chinese government. It’s best to move from a position of strength before it’s too late. However, as chip stock shareholders, it still hurts. As you may recall, Club holding Nvidia (NVDA) was particularly hard hit about 2.5 months ago when the Biden administration restricted exports of the most advanced US chips to China for fear that they not be co-opted for military purposes. Deutsche Bank delved into the semiconductor cold war between the United States and China in a research note on Monday, explaining how the industry got to where it is now and what it could mean. go further. While reducing our exposure to Club chips lately, we have maintained small positions in Nvidia, Advanced Micro Devices (AMD) and Qualcomm (QCOM) as semiconductors are at the heart of the technology that powers our modern world. For investors, especially those focused on the short term, it is easy to criticize the recent US government strike against China, which limits sales of chips that exceed certain performance thresholds and bans those with the US citizenship to support China’s own efforts to develop advanced chips. . After all, the two countries have prospered in recent years thanks to a symbiotic relationship: the United States designs the chip and a mix of companies located in the United States and Taiwan manufacture them, with China being one of the main buyers. . However, from an American perspective – and arguably one of the longer-term investors who understands that sometimes future gains require short-term pain, the decision to act now and not delay any longer makes sense. Deutsche Bank analysts pointed out that the industry has key bottlenecks, especially in the hotly contested region of Taiwan, calling that Taiwan Semiconductor Manufacturing Company, often referred to as TSMC, accounts for “54% of total production of semiconductors and 90% production of advanced chips. We want to focus on advanced chips because they pose the big risk to the current world order if they fall into the wrong hands. Deutsche Bank offered a little more historical context in its note, writing that due to a supply chain shift in the mid-1970s as well as domestic underinvestment and increased competition, manufacturing or manufacturing of semiconductors in the United States, the market share has fallen from 37% in 1990 to 12% currently. At the same time, China’s share of manufacturing has grown from 1% to 15% now, with the country previously setting a target of being 70% self-sufficient by 2025. As we have seen seen throughout the pandemic, as friendly as the two global economic superpowers may seem on the surface — but perhaps not so much lately — the self-interests of both are always going to come first. As a result, it is simply too risky to allow China to continually acquire a position of increasing control over the semiconductor manufacturing process. To do so would be to put the United States at the mercy of its main challenger on the world stage. US companies such as Nvidia and AMD could dominate in cutting-edge chip design, with Deutsche Bank analysts noting that the US has 41% “market share in semiconductor manufacturing equipment and 85% in electronic design automation software. However, it will be useless if we cannot manufacture these designs. For this reason, we believe that, as painful as it may be in the short term, the United States is not wrong to block China’s advance. By limiting China’s access to cutting-edge American technology, the United States is effectively making China’s 2025 goal much more difficult to achieve, if that’s even possible at this point. After all, it is not easy to replicate the type of equipment produced by American capital goods manufacturers. Finally, remember that due to the latest restrictions, US citizens risk losing their citizenship if they choose to help China pursue its advanced chip production goals. So not only is the United States limiting what is exported to China, but the government is also taking material steps to block China’s ability to grow internally. Along with these defensive actions, we are happy to see more domestic support for the semiconductor industry. On Monday, as Reuters reported, TSMC founder Morris Chang claimed that while plans are yet to be finalized, the company “plans to produce chips with advanced 3-nanometer technology at its new factory in the U.S. state of Arizona”. Given the growing tensions between the United States and China, as semiconductors become more pervasive in our daily lives and national security applications, and the risk of earthquakes in the region, we believe it stands to reason that TSMC’s future investments could be concentrated outside of China. reach, even if not directly in the United States due to factors such as relatively high labor costs. As Deutsche Bank analysts rightly point out: “By delaying China’s ability to manufacture high-end chips – as advanced chip development advances in the United States at a rapid pace – the power of China’s calculation will fall further and further behind. That’s why we believe that while the short-term pain may be acute, optimism is warranted from a longer-term perspective, with analysts arguing that “over the long term, assuming lower competitive pressures from the ‘China’s advanced semiconductor industry, we expect the United States companies will likely increase market share.’ Semiconductors are at the heart of almost every secular growth trend you can think of, whether it’s cloud computing, autonomous driving, warehouse automation, sustainable energy innovations and tools needed to advance sustainable agriculture. They are literally the building blocks of what many, including the World Economic Forum, have called the Fourth Industrial Revolution. So, as chip cycles come and go, it makes sense to have an industry stake in your portfolio. This is one of the main reasons why despite the recent reduction in our chip positions (and the exit of Marvell Technology) due to short-term concerns, we simply could not justify exiting the sector altogether. However, at the moment the United States has the upper hand – and therefore we believe it is right to act now and take any pain in the short term in order to best ensure the continued dominance of the US. industry on the road. (Jim Cramer’s Charitable Trust is long NVDA, AMD, and QCOM. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. 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NVIDIA DRIVE Thor, the company’s next-generation central computer for autonomous and assisted driving and in-car infotainment, is shown in a document image obtained September 20, 2022.
Nvidia | via Reuters
It’s understandable why the United States felt the need to act quickly to keep powerful semiconductors out of the hands of the Chinese government. It’s best to move from a position of strength before it’s too late. However, as chip stock shareholders, it still hurts. As you may recall, Club holding Nvidia (NVDA) was particularly hard hit about 2½ months ago when the Biden administration restricted exports of the most advanced US chips to China for fear they would be co-opted for military use.
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