October 18, 2024 (Globalinvestorideas.com Newswire) Globalinvestorideas.com, a go-to platform for big investing ideas releases market commentary from Hani Abuagla Senior Market Analyst at XTB MENA.
Do you know the Taiwanese company TSMC? According to the name, it probably does not belong to the mean names, but believe me, it is one of the most important companies for the modern world as we know it today. TSMC is the most advanced manufacturer of logic chips that are used, for example, in smartphones, computers, tablets and servers. Its biggest customers include, for example, Apple, for which it produces A chips for iPhones as well as M chips for Macs and iPads, Qualcomm, AMD and Nvidia. TSMC is estimated to produce more than 90% of the world’s most advanced and powerful chips used in everything from smartphones and computers to home electronics to the military and artificial intelligence. I will not exaggerate if I say that without this company the world would literally (ok, maybe not literally but figuratively) stop. This company is also interesting because it produces almost all of its production, especially the best, in Taiwan. However, this island is a geopolitically very hot area, as Taiwan considers itself an independent state, which China does not agree with, which claims the island as part of its territory.
In recent years, it has been conducting increasingly provocative military exercises in its vicinity, and it is not excluded that one day it will decide to directly attack or block the island. Some time ago, the Bloomberg agency came up with a calculation that says that in the event of an attack, world GDP would drop by 10% in the first year. Just for comparison, the impact of covid or the great financial crisis was at the level of 5%. Therefore, invading Taiwan would be as bad for the world economy as the financial crisis of 2008 and covd combined. Understandably, the attack itself would hurt Taiwan the most, whose economy, according to estimates, would drop by about 40%, but China itself would also feel the problems, where it is estimated that the GDP will drop by roughly 20%. China is a huge customer for TSMC, so it would cause problems for itself, and it is almost certain that the Western world, which stands behind Taiwan, would impose sanctions on China that would break up world trade. Such an event would therefore have a great geopolitical and economic impact on each of us. But let’s go from hypothetical situations back to reality.
TSMC was created as a company that may have been the first to think that it might not be a bad thing to separate chip development from its production. Until then, it was a relatively common model for manufacturers to design and manufacture their own chips, and this is still done today by Intel, for example. But the founder of TSMC started to go around chip companies and offer them that he will make their chips better and cheaper and that other companies will focus only on the design. So everyone will do what they are good at. So you can imagine TSMC as a baker who bakes bread and other companies as a person with a recipe for this bread. Recipes in this case are provided by Apple, AMD or Nvidia, for example, TSMC is the baker. Over the last decades, this system has proven to be very good, as TSMC is the absolute top in its field. The latest financial results reported by TSMC over the course of the week were absolutely phenomenal and shot TSMC’s market cap back over the $1 trillion mark. Only Apple, Microsoft, Nvidia, Amazon, Alphabet, Saudi Aramco and Meta are larger companies. TSMC is therefore larger than, for example, Berkshire Hathaway, Tesla, Walmart or VISA. Just for fun, TSMC’s net margin was 43%. The company earns 43 cents from every dollar spent, which, with the exception of Nvidia, cannot be matched even by large American technology companies. The fact that the company is so good means that it makes a lot of money and can also invest a lot of money, which should increase its lead even more. TSMC will reinvest more than 30 billion USD this year and next year, i.e. more than 60 billion in total.
Currently, only two companies in the world have the ambition to compete with TSMC – Intel and Samsung Electronics. But the last years show that it is only wishful thinking and in reality it will not be so easy. Intel is reeling in trouble and has fallen into a loss, Samsung Electronics makes many other products and electronics in addition to the best chips, and is also scrambling for TSMC. But why can’t the mentioned companies catch up with TSMC? There are several reasons. The first is that at least Intel fell behind technologically and overestimated its position. In addition, Taiwan’s work ethic is much higher than, for example, the American one, Taiwan also has a huge number of skilled people who have been adapting to local conditions for decades, and a comprehensive network of suppliers has also been built on the island. In other words, TSMC has been building this whole system for decades and it’s really hard to copy.
TSMC itself was convinced of this, and as part of increasing production safety, it also builds factories in the USA, for example. Already during construction, she encountered delays in the construction itself, a lack of qualified people willing to work long hours, higher energy prices, the distance of suppliers and the like are also a problem. If TSMC can’t do it, it will be all the more difficult for other companies, not to mention that a modern chip factory costs tens of billions of USD, and the production of chips itself will be much more expensive in the US, which gives TSMC another competitive advantage. So it looks like the world will be dependent on Taiwan for a very long time.
There is one more company in this chain that is perhaps even more important than TSMC. In the text above, I mentioned the recipes and the baker. But someone has to make an oven when baking bread, and the best ovens are made by the Dutch company ASML, which is probably the only large relevant technology company in Europe. ASML produces, among other things, EUV machines, where the prices are around 200-300 million USD for each machine, and TSMC is the company that can best service these machines. From my point of view, ASML is probably the most fascinating company in the world and produces machines that could be considered complete sci-fi. Now I will briefly describe how such a machine works.
The EUV (extreme ultraviolet lithography) machine works by spraying tens of thousands of tin droplets inside every second. Then the lasers in the machine melt it by firing 2 shots at each droplet and letting it evaporate in the form of plasma. It emits UV radiation, which is reflected by a series of mirrors in the machine onto silicon wafers, on which the beam of this radiation cuts a chip. The beam is so accurate that if you shot it from the ground to the moon, it could hit an object the size of an apple. The mirrors are so smooth that if they were as big as Germany, they wouldn’t have projections higher than a millimeter. Some of them are polished for several years. This process results in transistors on chips that are about 3 nanometers in size. This is how much your hair will grow in about 3 seconds. The EUV laser itself has 457,329 parts. I probably won’t be far from the truth when I say that it is the most complex commercial product ever made. Machines from ASML run in factories for several months and are so sensitive that their accuracy is affected by changes in gravity, humidity or wind outside (even if the machine is separated by several walls) or even when someone tens of meters away closes the door harder. ASML also has the advantage of an ecosystem where machines learn from each other. Each machine continuously sends data to the central office, on the basis of which the settings of other machines are adjusted, and so on and on.
It’s a largely unreplicable thing, and I wonder if anyone will ever come close to ASMl technologically. In the past, it was competed by companies such as Canon and Nikon, but they did not manage the transition to EUV technology and are currently no longer relevant players in the field of the best chips. ASML had long ago followed the path of a wide supply chain, while Canon and Nikon wanted to follow the path of vertical integration, when they wanted to do everything in-house, which eventually caught up with them. From this point of view, ASML and TSMC are perhaps the 2 most important companies in the whole world, and the chip sector is perhaps the most interesting.
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