The evolution of artificial intelligence (AI) is driving the need for better and more powerful microchips. This has been good news for those in the semiconductor space.
But after a prolonged period of outperformance compared to the wider market, the semiconductor industry has seen some ups and downs more recently.
One of the main reasons for the jitters has been around semiconductor supply chain uncertainty and the consequences this could bring.
US versus China tensions
A major focus is the ban on exports to China of the highest-end chips and most advanced manufacturing equipment.
China is the world’s largest consumer of microchips, and a significant manufacturer. But there’s a big technology gap between Chinese producers and those manufacturers of cutting-edge chips.
The US introduced the restrictions on the grounds of national security and other important nations in the semiconductor world have followed suit.
So far, the restrictions have been relatively ineffective in preventing the flow of chips to China. And elsewhere, the rules have had little impact on the surging demand for next-generation chips. Demand from data centres has played a big part, and that’s a space dominated by the US.
So, for high-end producers like NVIDIA, we don’t see this ban being a a massive risk. But for less-advanced commoditised processors, there’s a cloudier outlook.
Demand for consumer electronics powered by these chips is much weaker, and Beijing is pushing to phase out imports in favour of domestic suppliers in certain applications.
When it comes to manufacturing equipment, the export ban on more advanced machines is nothing new. It’s seen China ramp up orders for older technologies as it keeps developing its production base and stockpiles machinery on fears that export restrictions will be extended.
That’s supported the revenues of the companies involved in the production of these machines. There’s also been an increase in competition from Chinese equipment manufacturers, but the most cutting-edge technology still seems out of reach.
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Drive to diversify supply is still unlikely to dethrone Taiwan
The potential for tighter rules is a risk to watch. But the drive to onshore chip manufacturing in Europe, the US and other parts of Asia means that demand from other markets will likely stay strong.
However, that’s unlikely to dethrone Taiwan’s dominance of the manufacturing industry, particularly at the more advanced end of the scale.
Former president Trump’s comments last month that Taiwan should pay the US for its defence sent shudders through the market.
The threat of military action by China could be damaging to both the industry and the global economy. That means the world’s unlikely to stand by in the event of an attempted invasion.
It’s still a risk to be mindful of, but given how intertwined semiconductors are with so many other industries, it’s not one that only applies to this sector.
While investor sentiment can and will likely change over time, we’re positive about the long-term outlook for the sector. This is underpinned by drivers like AI, the energy transition and continued growth in wireless connectivity.
But it’s a complex industry, both technically and logistically. That ‘moat’ is part of the attraction, but also means that judging each stock on its merits can be challenging and there are no guarantees
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