Another Essential Supply is Being Threatened

Food and energy are two costs of living that the government doesn’t much like to acknowledge. They claim the prices in these sectors are too volatile and skew actual inflation numbers. 

Volatile though they may be, they are two categories consumers pretty much can’t live without.  

But there’s something else in which shortages could potentially bring our economy to a standstill. A market that has become so embedded in so many areas of our lives, that it has become almost as essential as food and energy…

…And has also become one of the most vulnerable.

The semiconductor market.

Fifteen years ago, when semiconductors were only used in building computers, the market was purely cyclical. Today they’re used in everything which makes them much more susceptible to the demands from various markets they supply.

And today, thanks to the pandemic lockdowns, they’re also struggling through a major supply shortage. But that’s not even the biggest threat.

A Most Essential Product That Is Most Vulnerable

A quick history lesson is in order here. 

In the mid-1980s, during the birth of the microchip revolution, industry leaders designed and manufactured their own chips. But in 1987, Chinese engineer Morris Chang made a bet that that would change. 

Chang believed that, as semiconductor design advanced, there would be a growing demand to outsource their production. With some financial help from the Taiwanese government, he founded the Taiwan Semiconductor Manufacturing Corp (TSMC). 

They billed themselves as “Switzerland of semiconductors” — they weren’t interested in the intellectual property behind the chip. All they did was manufacture them so individual tech companies didn’t have to. 

Chang’s bet paid off big time. Before long, most tech companies began outsourcing their chip production to TSMC… Which caused a shift in the semiconductor balance of power.

Today, the country of Taiwan accounts for 60% of the semiconductor industry’s revenue. TSMC accounts for 54% of that by itself.

And when you specialize in something, you get to be the best…

“Its (TSMC’s) technology is so advanced, Capital Economics said, that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. …  Most of the roughly 1.4 billion smartphone processors world-wide are made by TSMC.”

They make Apple’s chips exclusively.

And here’s the problem with all that…

Taiwan has had a complex and centuries-long relationship with China. But throughout most recent history they have been recognized by most of the world as a sovereign country.

China does not.

And they’ve made no secret of the fact that they believe Taiwan is part of China. 

China doesn’t want to reclaim Taiwan because of its glorious scenery. It wants them for their semiconductor industry. 

Should the Chinese make some move against Taiwan, either militarily or through some type of creeping political occupation, and gain control of the flow of semiconductors out of Taiwan, it could freeze the US economy for years.

And there’s nothing the Fed can do about that…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily