On Tuesday, U.S. Speaker of the House Nancy Pelosi landed in Taiwan, becoming the highest-ranking American official to visit the island in 25 years.
The move is being interpreted as a direct threat by China, which claims the island as part of its territory, and Beijing has repeatedly warned the U.S. that the Chinese army won’t “sit idly by” and “will take strong countermeasures.”
As the international community waits to see how China will react, in the business world, chipmakers are already feeling the pain of a brewing U.S.-China conflict over Taiwan.
Semiconductor stocks on Tuesday plunged in anticipation of Pelosi’s Taiwan trip.
Shares of Taiwan Semiconductor Manufacturing Co. (TSMC)—the world’s biggest and most valuable semiconductor manufacturer, valued at $440 billion—fell 2.4% on Tuesday. Its Taiwanese peers United Microelectronics and MediaTek dipped 3% and 1.6%, respectively. Meanwhile, U.S. chipmaker Intel stock dropped 1.5% on the same day.
As Pelosi gets ready to meet with Taiwanese President Tsai Ing-wen on Wednesday, technology investors are watching her moves closely—and any sign of retaliation from China. And chipmakers—particularly those in Taiwan—are at high risk of becoming collateral damage if there is a falling out between the U.S. and China.
Global chip disruption
Taiwan plays an outsize role in the global chip supply chain, as its manufacturers are especially important suppliers of advanced chips.
Global companies from Apple to Intel and Tesla depend on Taiwan to produce smartphone and computer processors, and A.I. chips for autonomous driving. And Taiwan’s chip dominance is only growing stronger—chipmakers in the country are set to increase their global market share to 66% this year.
That means that any Chinese move against Taiwan in retaliation for U.S. acknowledgement, and the resulting international fallout, would severely disrupt the global chip technology supply chain.
Mark Liu, the chairman of TSMC, said in an interview with CNN this week that the company’s sophisticated manufacturing operations rely on real-time global links with the rest of the world. Any military action or move to take TSMC by force would render its factories inoperable and create “economic turmoil” whereby most of the world’s advanced chip components will disappear, Liu said.
Experts agree. TSMC is the most irreplaceable company in the world today, Scott Kennedy, a senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies (CSIS), tweeted last month. Chinese action in Taiwan would affect TSMC’s production because it operates in close partnership with Dutch firm ASML to produce a type of advanced microchip. ASML would likely move its key personnel out of Taiwan—one-tenth of its staff work in the country—before any Chinese takeover, Mark Williams, chief Asia economist at research firm Capital Economics, wrote in a Tuesday note. “Without support from ASML, TSMC would be unable to increase [its] capacity of advanced chips or create next-generation chips,” he wrote.
TSMC has already begun shifting operations outside its home base in preparation for international fallout. The Taiwanese company is building a $12 billion plant in Arizona and an $8.6 billion factory in Japan. It has also promised $100 billion over the next three years to shore up its chip capacity and help resolve the global chip supply-chain issues resulting from the COVID-19 pandemic. TSMC has chip fabrication plants in China as well.
But it’s not just a literal invasion that could destabilize the global chip industry. China could retaliate against the U.S. and Taiwan in other ways. Beijing, for instance, could pressure Taiwan by surrounding its borders and dictating what goods and people are allowed to flow in and out, including Taiwan’s high-end chip supply, Williams said.
“The prospect that this supply could be disrupted or severed in the near future would trigger panic-buying and stockpiling” by countries, Williams wrote.
Even before the announcement of Pelosi’s visit to Taiwan, there was “little near-term optimism surrounding the trajectory of U.S.-China relations,” Jason McMann, head of geopolitical risk analysis at research firm Morning Consult, told Fortune.
But her visit will “likely prove to be the nail in the coffin—and will steer relations down a negative path more quickly than before,” he said.
Pelosi’s Taiwan trip comes at a particularly sensitive time, as Chinese President Xi Jinping is expected to confirm his third presidential term at the Chinese Party Congress this October. Thus it’s “absolutely imperative that Xi doesn’t appear weak to his domestic audience,” Dan Pickard, attorney at Buchanan Ingersoll & Rooney and international trade and national security expert, told Fortune.
As a result, he says, “there will be significant pressure on Xi to take action rather than rely on the typical bellicose statements.”
In the event of a Chinese invasion of Taiwan, there would be a “hard decoupling of most trade, investment, and financial flows between the West and China…at minimum,” Williams wrote.
Aside from Taiwan specifically, the biggest chip companies in the U.S., like Intel, Nvidia, Qualcomm, and Advanced Micro Devices (AMD), have major exposure to China, and rely on the country for a large portion of their sales.
The U.S. public largely backs Taiwan’s sovereignty, with more than 60% of Americans supporting the country’s independence, according to a recent survey from Morning Consult. Over 40% of Americans say that the U.S. should definitely or probably impose economic sanctions against China if it invades Taiwan, such as banning U.S. investment in China.
But the U.S. and China are not on an inevitable collision course. China has “more than $1 trillion reasons—the size of their U.S. Treasury positions—not to have Pelosi’s trip lead to significant escalation,” Brendan Ahern, chief investment officer at Krane Funds Advisors, an investment management firm for China-focused ETFs, wrote in a Tuesday note.
China will need to respond in some manner to “satisfy the domestic audience…some level of saber-rattling, but I doubt [and] hope nothing more than that,” Ahern said.