Warren Buffett, who is famed for his unswerving focus on business fundamentals, knows a successful company when he sees one. While the track record of Berkshire Hathaway, Buffett’s conglomerate, is patchy in the technology sector, its big investment in Apple – which it began buying in 2016 – has paid off handsomely.
When Berkshire revealed last November that it had purchased a US$4.2 billion stake in Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker, this seemed like a smart move for a long-term investor focused on companies’ underlying value.
Not only is TSMC hugely profitable, it is growing exceptionally fast and has a virtual stranglehold on the global chip supply chain. Beijing relies on the Taiwanese semiconductor giant to furnish it with 70 per cent of the chips needed to power its consumer electronics sector. The United States, meanwhile, depends on TSMC to produce more than 90 per cent of the most advanced chips designed by its leading semiconductor companies.
Yet, no sooner did Berkshire disclose its stake in TSMC than it revealed that it had reduced its holding by more than 85 per cent. Earlier this month, Buffett said the decision was because of a reassessment of geopolitical risks as opposed to misgivings about TSMC’s business.
While the abrupt sale was uncharacteristic of Berkshire’s buy-and-hold investment strategy, it accentuated concerns about the economic fallout from one of the world’s most dangerous geopolitical flashpoints. Although Taiwan is straddling the fault line of a tech cold war between Washington and Beijing, pressure on the island increased sharply following the eruption of the Covid-19 pandemic.
Berkshire Hathaway chairman and CEO Warren Buffett chose to sell 85 per cent of his company’s shares of Taiwan Semiconductor Manufacturing Company only a few months after acquiring them. Photo: Reuters
The combination of acute supply chain disruptions, the downturn in the semiconductor industry and the severe escalation in tensions across the Taiwan Strait following Russia’s invasion of Ukraine has made it increasingly difficult for TSMC to manage the geopolitical divide.
Taiwan’s so-called silicon shield – the supposed security guarantee stemming from the island’s dominance of the global chip industry – has become more vulnerable. This vulnerability, moreover, is exacerbated by US plans to reduce its dependence on semiconductor supply chains from Taiwan and, more contentiously, enlist the island’s support in cutting sales of advanced chips to mainland China, a crucial market for TSMC.
Provocative comments from senior US government officials and legislators have inflamed tensions. Commerce Secretary Gina Raimondo described US reliance on Taiwanese chips as “unsafe”, while Michael McCaul, the Republican chair of the House of Representatives’ foreign affairs committee, said Taiwan’s chip industry was “very vulnerable to invasion”.
Fears over the “de-Taiwanisation” of the island’s chip sector were fanned by TSMC’s announcement in December that it would more than triple its investment in a new fabrication plant in Arizona to US$40 billion as part of its efforts to diversify production facilities. Even Morris Chang, TSMC’s founder, has said Washington’s efforts to rebuild chip production at home were futile and were weakening Taiwan’s silicon shield.
02:42
Biden tours new Taiwanese chip-making plant in Arizona, fans US-China semiconductor rivalry
Biden tours new Taiwanese chip-making plant in Arizona, fans US-China semiconductor rivalry
Yet, while the semiconductor industry is rife with geopolitical risks, sentiment towards TSMC remains bullish. The company’s stock – which has surged 70 per cent since the start of the pandemic in March 2020, compared with a 45 per cent rise in the FTSE All-World Index, a gauge of global equities – is highly rated among analysts. According to data from Bloomberg, all but one of the 40 analysts who cover TSMC have a buy or equivalent recommendation on the stock.
The bullishness in the face of Taiwan’s precarious geopolitical position partly stems from the company’s strong fundamentals. TSMC’s leading position in the industry is impregnable for the foreseeable future. In the first quarter of this year, its operating margins were a staggering 45 per cent, with half its business focused on high-end chip production.
Just as importantly, its shares remain relatively cheap thanks to a geopolitical discount, especially when compared with those of Intel, its main US rival and one of its customers. However, two other factors are more important.
First, investors are notoriously poor at assessing and pricing geopolitical risk. This is why most tend to ignore it. In the case of rising tensions in the Taiwan Strait, this is almost certainly the right thing to do. Unlike financial dangers, geopolitical threats are binary. Either the status quo endures or things take a dramatic turn for the worse, in which case every asset is at risk.
06:01
There’s a global semiconductor shortage and this is why it matters
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Second, the main concern now is not TSMC but the broader tech sector. US tech stocks have soared this year and are trading at nearly 25 times forward earnings. To justify such lofty valuations, US interest rates would need to be cut by at least 300 basis points, according to Bloomberg. This will not happen given high inflation, though, setting up the market for a nasty fall.
However, US monetary policy is not half as worrying as its handling of the tech war. Washington appears to be tone-deaf to Taiwanese concerns about the island’s chip industry. The grim prospect of Donald Trump winning the Republican Party’s nomination for president for a second time only heightens concerns over US foreign policy.
This might be part of the reason Buffett sold the bulk of his stake in TSMC. Yet, the Oracle of Omaha is not infallible. As a manager of geopolitical tensions, few companies have been as successful as TSMC. Buffett could yet regret his divestment.
