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Chips, Dips, and Doughnuts - The Impact of a China-Taiwan Conflict

If you are truly concerned about a China-Taiwan conflict, consider the Chips, Dips and Doughnuts, and some exposure to TSMC should not be your most pressing concern.

TSMC is the world’s largest manufacturer of logic integrated circuits (ICs). One of TSMC’s most often cited investment risks is a China-Taiwan conflict. Most of TSMC’s manufacturing capacity is in Taiwan and those facilities could be destroyed/materially damaged in such a conflict. Without the ability to manufacture ICs, TSMC’s earnings would take a material hit and its very existence could be threatened. It follows that some investors might question how Pella rationalises these risks.

The threat of such a scenario is not only an issue for investors in TSMC, but it would also be hugely problematic for large sections of the share market and the global economy. Our contention is that anyone avoiding TSMC exclusively due to the threat of a China-Taiwan conflict should not have meaningful exposure to virtually the entirety of the share market.

A China-Taiwan conflict would take an enormous toll on the global economy and markets for the following three reasons: Chips; Dips in global trade; later order impacts that could result in some Doughnuts.


Chips, semiconductors (semis), and integrated circuits (ICs) are one and the same. They are the stamp-sized electronic components that sit inside all electronic hardware, including computers, mobile phones, automobiles, home appliances, and airplanes. A disruption in the IC market impacts all electronic hardware, which impacts software, and every other area of modern life.

Taiwan is critical to the IC industry. It is responsible for manufacturing 35% of the world’s logic ICs (and a significantly larger portion of leading-edge logic chips), 14% of the world's optoelectronics, and 11% of memory ICs. In addition, 15% of the world’s silicon wafer manufacturing capacity is in Taiwan, and 19% of the world's Outsourced Semiconductor Assembly and Test (OSAT) occurs in Taiwan. A disruption in Taiwan would reverberate throughout the global semiconductor industry.

Figure 1 - Manufacturing capacity by location and chip type, 2020

Source - SEMI, World Fab Forecast, Nov-20

Taiwan's most critical role in the IC industry is manufacturing logic ICs. Figure 2 illustrates that 92% of the world’s most advanced ICs (<10nm) were manufactured in Taiwan in 2019. This means that any disruption to Taiwan would bring the market for the most advanced logic ICs to a stop.

Figure 2 - Global logic processing technology by region, 2019 (%)

Source - Semiconductor Industry Association, State of the Industry report 2021

Without 92% of the world’s capacity to manufacture <10nm logic ICs, the most advanced IC that Apple would be able to source in scale for the iPhone is the A11, which means the most advanced iPhone that could potentially be manufactured is the iPhone 8. The most advanced architecture NVIDIA could use would be the Turing and Volta, taking its technology back to 2017/2018, potentially eliminating the c$900Bn in additional market cap NVIDIA has enjoyed since the AI boom. Then there are the large tech companies (Alphabet, Amazon) that design their own ICs to optimise the performance of the servers that run their business. Amazon would need to revert to the ICs it released in Nov-18, putting the performance of its servers back five years.

A problem with the above discussion is that it assumes companies like Apple, Nvidia, and Amazon could produce the earlier generation ICs. However, with Taiwan accounting for 28% of the global capacity for 10-22nm logic ICs, that market would also face a severe supply squeeze. The iPhone 8 would suddenly become a prized and scarce resource. Meanwhile, almost 50% of the market for 28-45nm logic chips would disappear, which would severely curtail the capacity to manufacture automobiles and consumer electronics, and medical equipment. Production by companies from Tesla to Caterpillar, Boeing, General Electric, and Medtronic would be severely curtailed.

The above impacts would extend beyond hardware and into software and services. Google would have to curtail search functionality,’s cloud-based software would be less efficient, and META’s apps (Facebook, Instagram, WhatsApp) would not work as well.

The technological and economic upheaval from the curtailment/destruction of Taiwan's IC industry would persist until that manufacturing capacity could be rebuilt. Under normal circumstances it takes three to five years, from preconstruction to full production, to build an average fab and four to six years to build a best in class fab. However, this is under a normal operating environment, and it would take longer in an environment where there is a shortage of ICs required for the equipment to build the fabs. Add to the equation the need to build >30 fabs that are currently positioned in Taiwan, and we expect such an undertaking would require more than ten years.

At least ten years of curtailed and restrained (in some advanced applications non-existent) production and services would have a material impact on the earnings of Apple, Nvidia, Tesla, AMD, Google, Amazon, META, Medtronic, Boeing, Toyota, to name a few. Under such a scenario it is not an exaggeration to expect a global recession bordering on a depression which would impact JP Morgan, Citibank, Wells Fargo and, via contagion, the entire global financial system.

Trade (Dips)

A China-Taiwan conflict is likely to close the Taiwan Strait for shipping. The Taiwan Strait is the primary route for ships passing from China to the West and from Japan, South Korea to Europe. According to Bloomberg, almost half of the global container fleet and 88% of the world’s largest ships by tonnage passed through the waterway this year. Closure of that region would require shipping to use more inefficient routes, raising costs and other difficulties, e.g. sensitivity to typhoons. This would result in a dip in global trade and would be inflationary for the entire world.

Likely later order effects (Doughnuts)

A China-Taiwan conflict would almost certainly be detrimental to countries relying on Chinese consumers. The Chinese account for c30% of the luxury goods market, meaning companies such as LVMH, Hermes, and Kering (owner of Gucci) would likely experience a massive sales drop. Resource companies like BHP, Rio, and Antofagasta generate more than 30% of their revenue from China, which could be eliminated if there was a war. Even casinos would be hurt, with Las Vegas Sands generating c68% of its revenue from China, Wynn Resorts generating 41% and MGM Resorts generating more than 20%.

In such a scenario it is also reasonable to expect severe capital flight from China, and potentially the rest of Asia. This would result in financial crises in those markets, while depressing their currencies. China would likely try to defend its currency by selling reserves and would almost certainly cease buying US Treasuries, which would have a monetary tightening impact on the US, and the world. The cumulative impact of these factors is another reason to expect an economic and financial crisis, which would result in some stocks going bankrupt, and delivering investors a doughnut.


A discussion about the potential impact of a China-Taiwan conflict is important, however it should not be isolated to the impact on TSMC. Such a conflict would place a severe strain on the chips sector, placing a major hole in technology hardware companies’ earnings for an extended period. This would flow through to software and services companies, as well as the broader economy. Shipping from Asia to the US and Europe would be more expensive, resulting in a dip in global trade, and creating a source of inflation. Later order impacts would hurt every company relying on China as a consumer and would push up US treasury yields. In such a scenario a global depression is likely, the share market would tank, and some companies’ share prices would retreat to doughnut. TSMC would be severely impacted, but so would virtually every other stock. If you are truly concerned about a China-Taiwan conflict, consider the Chips, Dips and Doughnuts, and some exposure to TSMC should not be your most pressing concern.

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