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Companies like Apple ‘don’t quite have an alternative’ to TSMC: Analyst

Needham & Co. Semiconductor Analyst Charles Shi joins Yahoo Finance Live to discuss the impact of China's COVID policy on the semiconductor industry and companies that rely on chips.

Video transcript

AKIKO FUJITA: Well, chipmakers were certainly one group affected by the ongoing supply-chain backlog, but that wasn't the only issue for the sector. TSMC has long been a barometer for the health of the sector. US investors expressed uneasiness about Taiwan Semiconductors earlier this year because of national-security concerns around chips and Taiwan.

Some of those potentially resolved by the company's investment in a US plant in Arizona. Now, though, that investment is now drawing concerns in Taiwan where chip manufacturing is the backbone of the economy.

Let's bring in Needham Co. semiconductor analyst Charles Shi. And, Charles, I want to see if we can kind of separate these two issues. There's the issue of national security and then the issue of the backlog that happened because those borders were shut down during the pandemic. How much of one is driving the other?

CHARLES SHI: Well, I want to make sure I understand the second part of your question, but first let me address the first part on national security. I think from a business perspective, it's national-security issue actually means for the companies means the business-continuity issue.

I think one thing that over the last three, four, five years as Taiwan Semi rises to where they are, the global giant-- that's what President Biden said. They become a near-monopoly at the most advanced semiconductor manufacturing.

What that means is companies like Apple, which account for Taiwan Semi's quarter of sales, they don't quite have alternative to Taiwan Semi. So to those companies, what that business continuity means is they would like to-- like Taiwan seem to have a little bit geographically diversified manufacturing footprint.

Taiwan Semi hadn't been, like, really have much presence outside of Taiwan, and their initial plant in Arizona has been seen as probably that's a token fab. That's what I've heard. But I think two, three days ago the big announcement in Arizona, that definitely shows their commitment to provide their customers the business continuity by solving the business-continuity issue for the companies, for the customers.

I think indirectly that addresses the national-security concern by the United States and, quite frankly, many, many companies-- many countries in the world that depends on Taiwan Semi to provide them the most leading-edge semiconductor manufacturing.

AKIKO FUJITA: Yeah, we have seen this administration firmly focused on onshoring production. And my question to you is, how much of that stems from what happened during COVID, the realization of the overreliance on Chinese production? But separately from that, how does China now respond to this policy at a time when they may not have the most advanced equipment coming in from some of the Western countries?

CHARLES SHI: Well, I think semiconductor industry is a globalized industry. Let's not forget that it was born in 1960s, '70s. It grew as the globalization develops and actually lifted China out of poverty, right, starting from the 1980s.

I think, even for China, the access to global semiconductor technology is important, and I don't think it necessarily should mean that China should have everything on its soil, just like the US doesn't have everything on US soil. I think it's unfortunate that there are signs of deglobalization in recent years, but I think the semiconductor industry, this is an industry where, if you have the technology, you have the customers. You have the demand. If you don't have the technology, you just don't have that-- well, you just can't do anything about that.

So in terms of how China is going to respond, I can't really provide a clear answer. But I think from China's perspective, they would rather keep access to Taiwan Semi. I mean, at least Taiwan Semi, at least that's what they would prefer to do. But I think for a business-continuity standpoint, they still should have-- they still should think about providing the alternative geographical manufacturing footprint to their customers, not just in Taiwan, maybe in the US.

- And, Charles, you added TSMC to the Needham conviction list, but you do expect the wafer shipments to start declining in the first quarter of 2023. Walk us through your theory there.

CHARLES SHI: Well, semiconductor industry is actually-- it's cyclical, but it's actually surprisingly consistent in terms of the trend line. The trend line is there, the 20-, 30-year trend line. It's a growing secular growth industry.

But when the shipment, in terms of measured by unit, goes above the trend for a period of time-- which is something we have seen starting in 2020, 2021, lasted into at least the first half-- maybe the third quarter 2022. You will go under the trend for a while to bring the overall trend to the long-term trend line.

So what we think is going to happen is there will likely be a reset of Taiwan Semi's unit shipment or the wafer shipment starting in Q1 2023, but the reset is actually good news for the stock. So we'll likely see next year is the numbers may come down. They may miss estimates, but the stocks may actually do very well next year. That's my projection here.

- All right, we'll certainly be keeping an eye on that. A big thank you to Needham & Company semiconductor analyst Charles Shi. Thank you so much.