Taiwan Semiconductor's Export Restrictions: A Blow to China's AI Ambitions and Opportunities for Investors

In late November, the US Department of Commerce sent a letter to Taiwan Semiconductor Manufacturing Co (TSMC), imposing export restrictions on certain sophisticated chips of 7 nanometer or more advanced designs, destined for the Chinese mainland. These chips power AI accelerator and graphics processing units, and the restrictions are set to take effect on Monday. This move has significant implications for China's AI development and presents opportunities for investors in the global semiconductor industry.

TSMC, the world's largest contract chipmaker, has been a crucial supplier of advanced chips to Chinese companies, with its revenue from the mainland market decreasing from 20% in 2019 to 12% in 2023. The loss of the Chinese AI chip market could have a substantial impact on TSMC's revenue and market share, as advanced geometries accounted for 69% of its revenue in Q3 2024. However, the company has stated that it is a law-abiding company and is committed to complying with all applicable rules and regulations, including applicable export controls.

The US export restrictions on TSMC's 7nm AI chips will have a limited impact on China's progress in developing advanced AI algorithms and applications, as leading high-tech companies in China have built sufficient computing power reserves. However, the restrictions could still cause some delays or increased costs for AI chip development and deployment, which could have knock-on effects on global AI innovation and adoption.

In response to the US restrictions, China may implement retaliatory measures, such as adding US companies to its Unreliable Entity List (UEL) or tightening restrictions on the export of critical minerals essential for semiconductor manufacturing. These measures could disrupt global supply chains and create uncertainty for US and international companies operating in China. Additionally, China could increase investment in domestic semiconductor production, further boosting its self-sufficiency in the industry.

The global semiconductor market and supply chains are likely to be significantly impacted by China's response to the US restrictions. Increased investment in domestic semiconductor production, shifts in orders to domestic and alternative foundries, and retaliatory measures could lead to a more fragmented global semiconductor market and supply chains, with countries and regions forming separate alliances or blocs.

Investors should consider the potential consequences of these restrictions on the global semiconductor industry and supply chains when making investment decisions. Companies that are well-positioned to benefit from increased demand for advanced chips, such as Samsung and SMIC, may present attractive investment opportunities. Additionally, companies that are involved in the production of critical minerals essential for semiconductor manufacturing could also be potential targets for investors.

In conclusion, the US export restrictions on TSMC's 7nm AI chips have significant implications for China's AI development and the global semiconductor industry. Investors should carefully consider the potential impacts of these restrictions on the market and supply chains when making investment decisions. By understanding the dynamics at play, investors can position themselves to capitalize on the opportunities presented by the evolving semiconductor landscape.