The Critical Industry in the Crosshairs of War
Conflict between the U.S. and China continues to simmer... A shot across the bow... The critical industry in the crosshairs of war... What you should know about it... The future of semiconductors... A story the mainstream media is getting wrong...
The precise flash point for a major international war can be difficult to predict...
The first thing that probably comes to mind for most people is an attack by one country on another country's soil... That situation, no doubt, is a very direct trigger point for likely more conflict between the two sides.
But often, the ultimate tipping point for an all-out, boots-on-the-ground war can occur as the culmination of a bunch of less-obvious events... And these events can play out over years or decades, like magma bubbling beneath a seemingly dormant volcano.
Then, once the volcano explodes, everyone notices... And they're seemingly shocked at what transpires from that point, even though the giant episode – and the threat from it – has been there since the beginning of the turmoil, lurking right beneath the surface.
Such is life today between the U.S. and China (and a few other places)...
If you read any part of Stansberry NewsWire editor C. Scott Garliss' recent interview with former Federal Reserve official and presidential adviser Dr. Lawrence Lindsey, you already know at least some of the backstory. (Read Part I and Part II, if you missed it.)
There are plenty of points of contention between the political leaders of the two largest economies in the world, starting with the broad approach of how a country should be run...
As we noted in the July 26 Digest, U.S. and Chinese diplomats recently aired their grievances in contentious meetings...
In a meeting room at a resort hotel in China, the Chinese foreign minister literally shared a "List of U.S. Wrongdoings That Must Stop" and blasted the U.S. as the "inventor of coercive diplomacy." Meanwhile, U.S. Deputy Secretary of State Wendy Sherman...
... raised concerns about human rights – namely, in Hong Kong and Tibet – freedom of the press, cybersecurity, and China's unwillingness to allow a full investigation inside the country into the origins of COVID-19.
Before the talks even ended, Chinese Vice Foreign Minister Xie Feng told Sherman that they were in a "stalemate." At least the higher-ups from the U.S. and China know where everyone stands if there was any doubt.
Yet, as I (Corey McLaughlin) examine the situation again today, I realize there was one big sticking point that didn't reach the surface. That's another thing about war, or any conflict, really... It can often be rooted in things that go unsaid.
So we will say it today...
If a major war erupts between the U.S. and China, one very important industry that touches all of our readers directly (considering it's indirectly how you're reading this right now) will be a central part of the story... And it might even be the precise trigger.
Scott is back today with follow-up thoughts to his interview that we published last week. As he'll detail, most folks don't realize that semiconductor manufacturing is squarely in the crosshairs of a major conflict brewing between the U.S. and China right now...
That might sound ominous for everyday life and the threat of war... But as Scott will explain, it also presents an opportunity to investors who are aware of the consequences.
Read on for more from Scott today... And be sure to check out tomorrow's Digest for even more discussion about this idea in a special guest essay from Stansberry Venture Technology editor Dave Lashmet, who will share his thoughts and unique take on this story.
For now, Scott takes the rest of today's Digest from here to talk about the intersection of geopolitics and technology...
Chinese President Xi Jinping has made one point noticeably clear...
He wants to reunify what the Communist Party believes is "traditional" China.
As we have seen in the recent past, Hong Kong was part of that process. Before the British government handed over the territory back in 1997, Beijing said it would support 50 years' worth of autonomous rule via the "one country, two systems" structure.
However, that independence hasn't exactly been seamless...
For instance, despite overwhelming support for pro-democratic candidates in the 2019 election, Carrie Lam – the chief executive of Hong Kong since 2017 – remains a supporter of the government in Beijing. And that is unlikely to change.
The situation in Hong Kong may also be laying the groundwork for future, similar developments elsewhere... like Taiwan, a state off the coast of the Chinese mainland that has a long, complicated relationship with China's communist rule.
In short, Xi has been vocal about the desire to bring the island of Taiwan back into the fold with China...
The republic of Taiwan and mainland China have essentially been in conflict since the Chinese Civil War in the middle of the 20th century.
I (Scott Garliss) won't get into all the details today. The important point to note is the present-day circumstances...
Back in January, during his New Year's speech, Xi called for a peaceful reunification with Taiwan based on the "one country, two systems" framework, just like Hong Kong. And he also warned that Beijing would resort to force if necessary.
This is a shot across the bow.
And when I look at this from an investing point of view, it makes me notice the potential of Taiwan's leading industries... Most people may not realize it, but Taiwan owns roughly 63% of the global semiconductor manufacturing industry's market share.
These are the chips that power our computers, smartphones, and other electronic devices that have become so essential to everyday life and production around the world.
For China, the acquisition of Taiwan would present a strategic technological advantage...
If China can walk in and rapidly take over the island, it will quickly gain access to innovative global technology... Taiwan Semiconductor Manufacturing (TSMC) owns about 54% of global market share, while United Microelectronics (UMC) controls another 7%.
Take a look at this chart...
Taiwan Semiconductor and United Microelectronics make chips for some of the best-known companies in the industry...
Giants such as Advanced Micro Devices (AMD), Apple (AAPL), Nvidia (NVDA), Broadcom (AVGO), Marvell Technology (MRVL), and Qualcomm (QCOM), among others, all do business with Taiwan Semiconductor. Meanwhile, United Microelectronics' clients include Infineon Technologies (IFNNY), STMicroelectronics (STM), Texas Instruments (TXN), Xilinx (XLNX), and SanDisk.
So you can see there is a lot at stake. Beijing has repeatedly said it wants to be the world superpower, supplanting the U.S... It's in a race to gain equal footing with both America and Europe from a technology standpoint. And this situation provides the perfect prize.
But that is not all...
By gaining access to various intellectual property blueprints, China can destroy the competition and dominate the technology industry. It can save itself years of spending on research and development by acquiring plans in rapid fashion.
So not only would it cost the country nothing to gain equal footing, but it could then turn around and produce those same products at a much cheaper cost.
That would be devastating to the companies currently doing business with Taiwan Semiconductor and United Microelectronics... They have spent years and endless amounts of money getting to the point where they are today. Their pieces of intellectual property are closely guarded because they're vital to their businesses and successes.
But their margins are equally important. You see, in technology, much like the pharmaceutical industry, those profits fuel future growth. Yes, many executives gain wealth from boosting margins, but a lot of that money is also used to fund future research. So, if that lifeline is destroyed, it could suddenly turn very profitable businesses into breakeven or even unprofitable ones.
And that would be a noticeable problem for the U.S. and Europe...
According to CompTIA, the leading trade association for the global information technology industry, the U.S. technology sector now employs more than 12.1 million people. That's around 8% of the country's workforce.
In addition, the sector made up $1.9 trillion, or 10% worth of gross domestic product ("GDP"). Loss of those jobs and revenue could have severe economic consequences.
According to Eurostat, the information and communication technology sector employs 5.6 million people (about twice the population of Arkansas) in the European Union. That's close to 5% of the workforce. It makes up about 4% of regional GDP, or around $561 billion. The area's three largest economies – Germany, France, and Italy – contribute the most in terms of absolute value.
However, the European Commission said that data is only through 2018 and likely incomplete... Based on the growth in technology use since then, it is likely those figures are low.
Last week, China took another aggressive stance in regard to Taiwan...
The People's Liberation Army ("PLA") of China conducted military drills along the southwestern and southeastern parts of the island on Tuesday. This was the second time this year that Beijing had effectively surrounded Taiwan while undertaking such operations.
China's military brass released a communique saying that fighter jets, warships, and anti-submarine aircraft had been sent near Taiwan to carry out "joint fire assault and other drills using actual troops." Taiwan's military said the aircraft had violated its air-defense space.
The PLA stated that these drills were being conducted as a response to "external interference" and "provocations" – and mentioned the U.S. in the conversation.
As we wrote in the August 18 Digest, the decades-old Taiwan Relations Act of 1979 makes the U.S. an ally of Taiwan, and it requires the U.S. to provide the country with arms.
The PLA recently said the U.S. and Taiwan have "repeatedly colluded in provocation, severely infringing upon China's sovereignty, and severely undermining peace and stability in the Taiwan Strait."
This response comes on the heels of a veiled threat by China state-run media outlet Global Times. Its editor, Hu Xijin, had a warning for Taiwan's political leaders following the collapse of Afghanistan. Hu is known as a mouthpiece for the hardliners in the country's decision-making body – or its "politburo."
Hu recently wrote that Taiwan's authorities must be trembling after the fall of Afghanistan's capital, Kabul. He said they should not expect the U.S. to protect them... and went on to recommend that they all order five-star red flags from China now in preparation for the eventual surrender to the PLA.
What should companies with business in Taiwan do?
They have three options...
- Wait around to see whether China's intentions are sincere
- Make contingency plans for the future
- Start diversifying the business now
If I learned one thing from my 20-plus years on Wall Street, it's that waiting to see how the situation plays out is typically the worst option for a business.
When a business decides to go that route, it's leaving its fate in someone else's hands. Most businesses don't like to do that... That's usually a recipe for disaster.
So that really leaves those companies with two options... contingency plans or diversification before it's too late. Contingency plans are great, but they still leave an individual or entity beholden to another's actions. Sure, you may be ready to act... But in a situation like this, it could prove to be too little, too late.
That means diversification is the best available strategy... As a company, you don't completely exit a situation, but you lessen your risk to the impending threat that you see.
By doing this, you aren't stuck with all your eggs in one basket. That way, if push comes to shove down the road, you have protected your intellectual capital and future revenue stream.
This changing geopolitical landscape could be a huge windfall for tech industries in the U.S., Europe, and Japan...
In a world where China has control over Taiwan, a lot of semiconductor business originating in Taiwan will have to go somewhere else.
What might that look like? Let's look at history for an indication...
Prior to Taiwan's explosion as the dominant maker of semiconductors in recent decades, the U.S., Europe, and China were home to the dominant businesses.
In the early 1990s, according to the Semiconductor History Museum of Japan, that country and the U.S. made up about 40% each of global semiconductor sales. Europe and Taiwan effectively split the balance.
Though that was many years ago, the implication is that infrastructure, skilled workers, and the ability to handle the business are not out of reach... Investments will need to be made, but it isn't out of the realm of possibilities. In addition, the task could be accomplished in a comparatively quick turnaround (of several years, not months).
Good companies will do this...
Intel (INTC) CEO Pat Gelsinger has already set the wheels in motion...
According to a report from the Wall Street Journal, Gelsinger has already participated in meetings at the White House regarding the possibilities. The article said that he had a meeting with officials from the administration of President Joe Biden there last month.
That's on the heels of the recent passage of legislation by the Senate that would invest $52 billion in the domestic semiconductor industry. It's a piece of legislation that Biden has said he will support... However, it has been delayed by ongoing negotiations in the House of Representatives.
Yet Gelsinger is not letting moss grow under his feet... According to the same Journal article, he's making a similar pitch across Europe. He is said to have been stressing the importance of diversifying the industry's production base.
And the timing seems to be ideal, too... The European Union said earlier this year that it plans to spend $150 billion on digital industry growth.
The situation could advance rapidly...
So instead of waiting to find out how it all might play out, now is the time to prepare.
Whether China takes over Taiwan or cooler heads prevail, it has highlighted a very real problem to the rest of the world... Increasingly technology-dependent global industries may all be hung up by a tiny chokepoint between the South China and Philippine seas – Taiwan.
And while the recent supply-chain hang-ups may seem bad now, just imagine what they would be like if the worst-case scenario played out... Entire industries could grind to a complete halt. Countries would welcome the current 20-week delay for semiconductors, which is up from the longer-term average of about 13 weeks.
So, it's in the best interest of every business to start diversifying its supply chain now. At the same time, it's also in the best interest of nations everywhere to foster and support that change. Otherwise, it could perpetuate an endless cycle of ongoing government support for all types of industries.
And at the end of the day, it should be to the benefit of companies that can facilitate that change like Intel and other forward-thinking, well-positioned businesses that make similar moves.
This is one of those trends that years down the road, you'll want to have known about now.
With all this in mind, we want to make sure you're aware of an important event tomorrow...
If you want to know more about how this story could unfold (and how to profit from it), be sure to carve out a few minutes for a special urgent presentation from one of our smartest and most successful analysts...
It's scheduled to go live just before the markets open tomorrow... And it will include a time-sensitive recommendation with potentially massive implications on your portfolio – as well as our entire way of life – in the coming weeks and months.
We don't put together presentations like this very often... The last time we did was more than six years ago. But with tensions heating up around the world, we want to make sure you're aware of this huge story that the mainstream media is getting totally wrong.
Before tomorrow's opening bell in New York, go to StansberryBroadcast.com to hear all the details.
You can also sign up in advance and receive a text-message reminder right before the presentation goes live... That way, you'll be sure not to miss anything. Again, you can do all of that right here.
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In today's mailbag, we're sharing some feedback on a pair of our colleague Dan Ferris' recent Friday Digests. Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.
"Hi Dan, wanted to comment on both [Friday's] Digest and the Fox and Hedgehog Digest. This might be more for my benefit (the act of writing it down) than your benefit.
"I am an active trader and have been for 10 years. I started out losing money and blowing up small accounts. Eventually I started losing less until I was consistently break even. Now it's a regular income stream. Once it became boring, I started making money. Funny how that works.
"I've traded stocks, options, forex, and futures. Basically anything with a chart. I've tried buy-and-hold, swing trading, options selling, small cap, income investing, you name it. About a year ago I decided to analyze all my trades.
"Because I kept trade journals, I went through all the data and found what I am best at. More importantly I found out what I should avoid at all costs. I found my 'hedgehog' so to speak.
"In [Friday's] Digest, your point about impact bias really coalesced for me. For my personality, any time I had a position for any length of time, I had to check on it 20 times per day. That position took up 'mental capital' in my brain. I underestimated the impact on my future brain's bandwidth to hold onto a position.
"So I narrowed my focus and specialize at what I am best at. Now it's easy to ignore other methods and styles of investing and trading. While there's many successful ways to approach the market, an approach MUST align with my personality.
"I just want to thank you for all the great Digests already written and looking forward to many more in the future!" – Paid-up subscriber Beau E.
All the best,
C. Scott Garliss and Corey McLaughlin
Baltimore, Maryland
August 23, 2021