Trade Wars weigh on the chip space today
2min read Semiconductor stocks, led by Taiwan Semiconductor Manufacturing Company (TSMC), saw notable declines today due to news that the U.S. government has ordered TSMC to halt shipments of advanced AI chips to Chinese customers. TSMC, the largest chip manufacturer globally and a significant player in the semiconductor ETF (SMH), experienced a 3% drop as investors reacted to the news. The restriction specifically targets chips used in AI applications, which are highly sought after in the tech industry, adding to concerns around future growth in TSMC's China segment.
While TSMC only derives about an eighth of its revenue from China, the country remains its second-largest market after the U.S. The implications of this restriction are not entirely clear yet, but TSMC has already notified its affected Chinese clients of the halt in shipments. The move highlights the continued tension between the U.S. and China, particularly in tech and AI, as the U.S. aims to prevent advanced technologies from bolstering Chinese firms in these areas. The restriction may signal further tightening in U.S.-China trade policies, especially in sectors deemed critical for national security.
Other semiconductor companies with exposure to China were also impacted. ASML, a Dutch semiconductor equipment company facing its own trade restrictions with China, saw shares drop sharply earlier this year, citing uncertainties around export controls as a significant headwind. TSMC, like ASML, remains cautious as any escalation in restrictions could impact future revenue, particularly as demand for AI chips grows. ASML’s experience underscores the risks TSMC could face as AI becomes an increasingly essential component of its revenue.
The latest restrictions come amid TSMC's efforts to capitalize on the growing AI sector, where it supplies chips to major players like NVIDIA, AMD, Google, and Apple. AI contributed significantly to TSMC’s strong Q3 results, and the company had projected AI revenue to triple year-over-year, representing a mid-teen percentage of FY24 revenue. Should these restrictions tighten further, TSMC may encounter a roadblock in expanding its fastest-growing business, potentially stunting its longer-term revenue growth in AI-related sectors.
Today’s news sent semiconductor stocks broadly lower, with key names such as Intel, Broadcom, Qualcomm, and Micron all seeing declines of around 2-4%. Nvidia and AMD fared slightly better but were also down about 1.6% and 1.3%, respectively. The U.S. government's letter imposing the restrictions reportedly cited concerns over advanced AI chips reaching China’s tech giant Huawei, which has been on the U.S. restricted list since 2019. TSMC’s proactive halt in shipments underscores the company’s caution, as it aims to comply with the evolving U.S. regulatory landscape.
This chip crackdown is happening against the backdrop of renewed U.S.-China tech tensions, with concerns that restrictions could expand under the new Trump administration. In previous years, the U.S. imposed several export restrictions targeting Chinese firms like Huawei, attempting to limit access to advanced technology. With TSMC now reportedly halting shipments of 7-nanometer AI chips to Chinese clients, the latest move may represent a new phase of U.S.-China tech rivalry, potentially leading to broader restrictions on AI-related technologies.
As chip stocks continue to pull the Nasdaq lower, the sector’s sensitivity to geopolitical developments is evident. The market may see further volatility if the U.S. expands restrictions or if China retaliates. Despite short-term setbacks, TSMC’s long-term prospects remain tied to the growth of AI technology. However, further regulatory hurdles could slow down its ambitions, presenting challenges not only for TSMC but for the broader semiconductor industry navigating the uncertain geopolitical landscape.