The semiconductor industry is on a bumpy, expensive road

The semiconductor industry is at an interesting crossroads, with U.S.-China tensions likely to force more diversification of its manufacturing base. This will be an extremely expensive process, with a single-chip foundry costing approximately $10 billion to build.

Taiwan is making sure they become an investment destination for those big factories. After meeting with the chief operating officer of Dutch chip equipment supplier ASML Holding (ASML), Taiwan said companies such as ASML are still injecting capital into Taiwan.

Warren Buffett's Berkshire Hathaway disclosed this week that it recently invested $4.1 billion in shares of TSMC, the world's largest contract chipmaker. TSMC has multiple chip manufacturing centers in Taiwan but also produces chips in China, the United States and Singapore.

Taiwan responded to suggestions that semiconductor-related companies may be forced to choose sides between the United States and China. Rick Tsai, chief executive of Taiwanese chipset maker MediaTek, said over the weekend that customers want to ensure they have a diverse chip supply base, in part so they can avoid any regulatory backlash that could disrupt their supply chains.

Some very large equipment manufacturers "will require their chip suppliers to have multiple sources, such as from Taiwan and the United States, or from Germany, or from Europe," Taiwan's leadership stressed. "In those cases, if business needs it, We will have to find multiple sources for the same chip."

MediaTek designs chipsets used in electronic products such as smartphones, tablets, GPS devices, wearables and smart appliances. It supplies Chinese smartphone makers such as Xiaomi and Oppo, helping MediaTek become the world's largest mobile chipset supplier in 2020, while it also has a wide range of international customers including Samsung Electronics and Amazon.com's Alexa devices .

MediaTek designs chips that are manufactured in TSMC foundries, and its top-end wafers are manufactured in Taiwan. But it also uses GlobalFoundries to make chips for older smartphone models. It also recently struck a deal with Intel ( INTC ) to use chips produced at its manufacturing plants in MediaTek chipsets for smart TVs and WiFi networks. By the second half of 2024, Intel should be producing chips for MediaTek in Ireland.

TSMC will invest $12 billion to build a chip foundry in Arizona. It expects to hold a "tool move-in" ceremony for the first factory in December, install the first production equipment, and aims to achieve mass production in 2024. It also reportedly plans to announce new semiconductor factories to produce cutting-edge processes. There's also likely to be about $12 billion in investment, and the two facilities will essentially sit side by side.

MediaTek plans to use TSM's business when it's up and running in the United States. CEO Cai said the company is already expanding its production base in an "incremental" manner.

This seems sensible. He's right that new U.S. regulations force a distinction between chips made in China and separate chips designed or manufactured in the United States. Europe's chips are roughly somewhere in between, although brownfield or greenfield sites for large manufacturing operations are hard to find in Europe.

The Taiwan statement noted that ASML's chief operating officer, Frederic Schneider-Maunoury, made it clear that his European company would continue to invest in Taiwan. It already employs 4,500 people at five factories in Taiwan.

Their statement said: "At a time when the world is watching and paying attention to Taiwan, I am very grateful to ASML for taking concrete actions to invest in Taiwan." 

The initial trade war between China and the United States spurred an influx of Taiwanese companies back home, and they were offered tax breaks, utility subsidies and assistance finding land if they committed to establishing new operations at home.

TSMC shares are up 16% since Thursday's close, with Asian tech stocks having a strong performance last week. Buffett's rebound on Tuesday produced a 7.9% gain, but the stock gained another 1.5% on Wednesday. TSM shares are moving away from two-year lows hit in October.

Berkshire Hathaway typically avoids technology investments, and Buffett has said he's unwilling to invest in anything he doesn't understand. While there's an opportunity cost, Buffett - who is often personally involved in approving large equity purchases even when his portfolio managers recommend them - takes pride in avoiding bad investments: "The first rule is never lose money," he explain. "The second rule is never forget the first rule."

Therefore, he must see some kind of bottom line for TSM's stock price. With its U.S. operations, the company is living proof that the chip industry can succeed in Taiwan.

Standard & Poor's released an interesting report this week, "Technology and Geopolitics: What if the Semiconductor Industry Bifurcated?" S&P believes this will be a timely and expensive process.

I don't think there are too many "ifs". The chip industry will bifurcate. As things stand, Silicon Valley and U.S. industry cannot easily supply to China without special permission or using older chip supplies. China already plans to develop a local chip industry, and these efforts will get an extra boost. Analysts say the U.S. action will set back those efforts by a decade or more.

S&P notes several risks if this happens. As companies build duplicate manufacturing bases, there could be an oversupply of a certain type of chip. Other popular chips may dry up.

Supply chains also need to be reconfigured. There are only a handful of companies in each segment of the chip industry: software/design; equipment manufacturers; “fabless” chipset manufacturers who outsource production; wafer manufacturers; foundries/fabs; and integrated design manufacturer. They are concentrated in the United States, East Asia and Northern Europe. Increasing hostilities between countries could lead to supply depletion at one point in the supply chain.

It will be interesting to see how this plays out. An investment of US$10 billion to US$12 billion is required in new fabs, which typically take five years to become fully available. However, one bottom line that may inspire Buffett's investment is that chips and semiconductors are the cornerstone of our modern wired lives.

The prospects are good, but the industry must figure out how to reconfigure itself.