Reliance on Taiwan Semiconductor Manufacturing Company Ltd. (NYSE:TSM), which manufactures 92% of the world's all advanced chips, puts the national security of the U.S. at risk, according to Eric Schmidt, former chief executive officer of Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG)
Schmidt, who co-authored an editorial with Harvard University Professor Graham Allison for the Wall Street Journal, says if TSMC's capacity goes offline — or if it falls into China's control — the U.S. technology sector will likely experience a severe impact.
If Congress passes the "U.S. Innovation and Competition Act," which includes a $50 billion investment in domestic chip manufacturing, the U.S. would still be spending only one-third of what China plans to spend, the authors explained.
China is also expected to leapfrog Taiwan as the world's biggest chip manufacturer by 2025. The country also makes more than half of the circuit boards for installing chips in devices and controls critical raw materials (silicon, gallium and tungsten) used for semiconductor fabrication.
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3-Pronged Strategy: Schmidt and Allison describe a three-pronged strategy to offset the competition.
- The U.S. should increase its thrust on less-advanced chips, which are currently the focus of companies such as Intel Corporation (NASDAQ:INTC) and GlobalFoundries Inc. (NASDAQ:GFS). Advanced chips used in smartphones and laptops make up only 2% of the global chip market.
- The U.S. can leverage on its political proximity with Taiwan and South Korea, and woo TSMC and Samsung to forge alliances with U.S. chip designers to manufacture advanced semiconductors in America. "A push from their governments, along with a pull from U.S. tax incentives and subsidies, could persuade TSMC and Samsung that building more chips in the U.S. is in their interests," the editorial stated.
- The U.S. should tighten the links between R&D and manufacturing and create incentives for investment in both.
The iShares Semiconductor ETF (SOXX) opened Tuesday's session at $361.51, and was up 3.47% at the time of publication.
Image courtesy of Pixabay.
