CHIP GIANT INTEL (INTC) ANTES UP ON CHINA’s TENSIONS WITH TAIWAN
increasing tensions between china and taiwan have created an unlikely winner: Lumbering chip Giant INtel.
Last month, American chip giant Intel hired Pat Gelsinger as its new chief executive officer. But at least for now, increasing regional tensions between China and Taiwan are making his hire irrelevant.
Gelsinger was anointed to turn the lumbering semiconductor behemoth down a fresh path. Think Microsoft circa 2002. Gelsinger urged employees to reignite a culture that fetches top talent. He deployed Intel’s powerful media storytelling machinery to talk up a return to glory. He recommitted to the core chip business in an effort to compete with market-specific semiconductor makers. Intel would indeed step up to challenges from flashy niche chip firms like LAM Research (LRCX), KLA Corp (KLAC), and SolarEdge Technologies (SEDG).
Gelsinger immediately found trouble. Company enterprise value tanked as investors balked at the costs of Gelsinger’s new vision. Intel posted bland results as competitors saw valuations skyrocket in the post-pandemic economy. Many wondered if the brilliant but often overbearing Gelsinger was up for the job.
At least for now, the debate over Gelsinger’s skill as an executive has quietly been subsumed by a larger valuation story about Intel, as a company. Even in its decline, the chip giant remains the largest chipmaker in the world, by most metrics. It has roughly 110,000 employees. Dwarfing the 12,200 median number of workers found at the other top 30 chipmakers. And Intel has deployed its vast chip-making cadre in carefully cached and hardened production facilities in diverse locations across North America, Ireland, Israel, and Malaysia. Only two major facilities are in China. Even at its current depressed value, Intel’s market capitalization is about $285 billion.
Traditionally, Intel’s scale and relative insulation from the wider silicon supply chain has been a liability in the newly nimble and cost-conscious 21st century semiconductor market. But times are suddenly more uncertain. Intel, almost accidentally, holds the fortified middle ground of an increasingly tense and fragile global semiconductor supply chain.
Intel’s mass makes it kind of neutral and potentially vastly lucrative “Switzerland of Semiconductors. “
Photo by Manoj kumar kasirajan on Unsplash
On A Rough Silicon Road.
Intel’s unexpected new leverage seems to be born from the practicalities of making computer chips. Most chips start out as silicon, an abundant material found in about 25 percent of the earth’s crust. Most of the silicon harvested flows into brute-force applications, like the ferroalloys that give cast iron and steel added strength and durability. But relatively minute quantities of can be elegantly crafted into highly pure forms that come to be make up semiconductors.
China utterly dominates the production of silicon. On average, it produces 10 times more than its nearest rival Russia and 40 times more than the median annual output of the remaining top 15 silicon producers. But despite its manufacturing muscle across all product lines, China tends not to make semiconductors on any scale. Instead, it is tiny Taiwan that holds the high ground at the other end of the silicon supply chain. Taiwan makes at least half of the finished computer chips that go into computers, artificial intelligence, vehicles and more.
Taiwan’s dominance in finished computer chips was not accident. Starting in the 1970’s the country embarked on a socioeconomic bet on computer chips. That’s when a group of Taiwanese businessmen “licensed” (“stole” is likely a better description) chip fabrication intelligence out of an American RCA plant. Since then, Taiwan’s commanding position in the global chip market has grown to $115 billion. The country is finishing the construction of a $20 billion computer chip fabrication plant, probably the largest on earth.
Taiwan’s dominance in computer chips is so large that it is increasingly seen as a key to geopolitics. Pandemic-induced fears exposed a deep, almost dangerous dependency on Taiwanese-fabbed semiconductors. Shortages loom for the computer intelligence found in commercial and home automation. Taiwan even poses strategic risks to larger enterprises and the national security interests of many countries.
“Pound for pound, Taiwan is the most important place in the world,” wrote The New York Times at the end of 2020.
China’s Looming Chip War
Taiwan’s chip muscle has not been lost on the Chinese. China has gone through waves of importing and stockpiling computer chips. And China has slowly but surely been has flexing its military muscle over Taiwan. Since September 2020, China has deployed about 30 combat aircraft and a half-dozen naval ships in the Taiwan Strait. That is the body of water, about the size of the Long Island Sound, that sits between Taiwan and the Chinese mainland.
China’s escalating aggression has prompted a tense policy response in Washington. When President Joe Biden’s Press Secretary, Jennifer Psaki, was asked if she was worried about the increasingly tense rhetoric between China and Taiwan, the otherwise loquacious and accommodating Psaki ended the line of questioning with a terse, “I don’t think I have anything more for you.”
The moment makes one wonder: Could this be war?
It is this geopolitical uncertainty that makes Intel’s scale, diversified assets, and bland-but-consistent production methods so attractive. Intel may not produce the most innovative semiconductors. They are certainly not the cheapest. But Intel will be able to deliver whatever product it tries to make. And as relations deteriorate between China and Taiwan, Intel’s product drawbacks will be overlooked by customers. As far as we understand, Intel’s logistics muscle will make it the go-to source for the reliable supply of chips in increasingly unreliable times.
Fairly soon, one computer chip in hand will be worth the two chips in the bush. Just think of the margins.
