Taiwanese chipmakers are ahead of their international rivals and it will be tough for U.S. tech companies to reduce their reliance on Taiwan, said Sebastian Hou from CLSA.
Tech firms like Apple, Amazon, Google as well as Qualcomm, NVIDIA and AMD rely heavily on Taiwanese contract manufacturers to produce up to 90% of their chips, according to Hou, who is managing director and head of tech research at the brokerage firm.
“It’s going to be a challenging and long journey for them to diversify away, and thinking about how long it takes for the chip development and cooperation — it’s going to take a while,” he said Monday on CNBC’s “Street Signs Asia.”
Semiconductors are used in everything, from smartphones and computers to cars as well as home appliances.
While the United States dominates the global semiconductor market share by revenue, Asia is the manufacturing powerhouse, according to a recent report from Bank of America. Asian countries produce more than 70% of global semiconductors — Taiwan and South Korea, in particular, have established unrivaled positions in high-end chip manufacturing capacity, the report said.
The global semiconductor shortage and geopolitical tensions with China has heightened Washington’s scrutiny of the supply chain. It has triggered a drive to bring manufacturing back to American soil to regain leadership and earmarked billions of dollars for its efforts. The U.S. is also said to be looking at alliances with other countries.
Upside for Taiwan chipmakers
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip foundry, is up more than 13% year-to-date. Its rival United Microelectronics Corp — seen as a distant second to TSMC in Taiwan’s contract chip manufacturing space — is up about 16% in the same period.
CLSA has a “buy” rating on TSMC and a price target of 825 New Taiwan dollars ($28.97) — that’s a 35% upside from Friday’s close.
The brokerage has an “outperform” rating on UMC and a price target of 62 New Taiwan ($2.18), a 16.76% upside from last week’s close.
Hou explained that between the two stocks, TSMC has a higher risk — due to a wider spread between its target price and current share price — but it offers greater returns. He added that the price target is “highly achievable” since the company is expected to maintain technology leadership over the next five years and customers are set to rely heavily on it.
China’s SMIC lagging
A report from market research firm TrendForce ranked China’s Semiconductor Manufacturing International Corporation (SMIC) fifth by revenue among the world’s top 10 foundries in February, based on estimated first quarter numbers.
SMIC is China’s largest and most important chipmaker — it is seen as key to Beijing’s plans for self-sufficiency in the semiconductor space, following tensions with Washington. Last December, the U.S. blacklisted SMIC, and restricted American companies from exporting technology to the firm.
Hou explained that it is almost impossible for SMIC to catch up with TSMC and other chipmakers in light of the U.S. sanctions.
The technology gap between SMIC and TSMC is currently about six years, he said. If SMIC cannot acquire the technology it needs to bolster its high-end chip manufacturing capacity, it will fall behind even further, Hou said.
“Which means, it not only cannot catch up, but the gap will further be widened,” Hou said, adding the gap may extend to between seven to nine years.
A report last month from Reuters said the U.S. government has been slow to approve licenses for American firms to sell chipmaking equipment to SMIC.
