To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$ is the bellwether of the global semiconductor industry, as it commands over 50% of the semiconductor foundry market, manufacturing and supplying more than half of the chips to semiconductor design companies for various electronic components for automotive to telecommunications.

This is particularly true of the state-of-the-art technologies featuring the smallest feature sizes that only TSMC and its nearest competitor Samsung Foundry are capable of delivering.

Given the scarcity of the latest and greatest chip supplies, TSMC enjoys much better margins compared to its peers. With its enormous size, it also wields significant bargaining powers against its customers and suppliers.

Nevertheless, TSMC is not immune to the highly cyclical characteristics of the semiconductor industry. The earlier global supply disruptions of semiconductor chip have prompted many semiconductor foundries to invest heavily to build new factories and expand their capacities, as they anticipate demand to outstrip supply in the foreseeable future.

However, with global demand softening, the new factories and additional capacities are going to lead to a supply glut down the road.

As the previous worldwide chip shortages during the onset of COVID-19 had caused much hardship in the economy, especially the automotive industry which witnessed numerous shutdowns of car makers halting production and retrenching workers for lack of essential semiconductor chips that drive modern cars which are equipped with increasingly more and more sophisticated electronic components, securing domestic semiconductor supply has become a prime importance for national security in many countries, including the United States that has found itself lagging behind. These countries are employing both carrots and sticks to push semiconductor foundries to set up new factories within their borders, that may not necessarily be the most efficient places to run semiconductor foundry operations, for supply to domestic markets.

With business decisions affected by political reasons, some expansion plans are carried out without compelling financial and economic justifications, heightening operating costs and worsening oversupply.

As much of these new capacities are still in the process of construction and installation, I believe that the worst supply glut has yet to come.

Rising interest rates as central banks around the world hike rates to rein in surging inflation also increase borrowing costs and depress asset valuations. This is especially detrimental to semiconductor foundries which are heavily capital-intensive and borrow to finance their expansions.

Until global semiconductor chip demand recovers, which I believe to be unlikely soon, I’ll stay away from semiconductor stocks in the meantime.

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