Dear Reader,
Taiwan has long been an oddity on the global stage. Its status as a territory, a republic, or a country entirely depends on whom we ask.
It has the GDP of a developed country at nearly $1 trillion. That would put Taiwan just behind Saudi Arabia as having the nineteenth largest economy in the world.
For decades, the U.S. had official diplomatic relations with Taiwan as a sovereign country until U.S. President Jimmy Carter revoked Taiwan’s status in 1979 in favor of China.
Today, only 13 countries recognize Taiwan as a sovereign country. And with the exception of Paraguay, they’re all small island nations like Palau, Saint Kitts and Nevis, Tuvalu, and Haiti. In other words, they don’t have too much to lose if Beijing gets upset.
But Taiwan as an independent entity – irrespective of what anyone defines it as – has become critically important. It’s singularly the most important place on the planet for the semiconductor industry. Taiwan Semiconductor manufactures most of the bleeding-edge semiconductors used globally on this relatively small island.
And Taiwan is home to some of the most important companies that manufacture silicon wafers – the foundation upon which semiconductors are etched. That’s not to mention all the other related industry companies that contribute electronic components, materials, testing, and assembly for semiconductor manufacturing.
Put simply, if Taiwan’s exports were constrained or halted, the world’s economy related to anything that requires semiconductors would grind to a halt. And that’s what makes the latest developments in mainland China so deeply concerning.
The 20th National Congress of the Chinese Communist Party began on October 16. President Xi Jinping’s speech was chilling.
Xi had already served two five-year terms as President. He reached his limit, but reminiscent of Putin, he found a way to change the rules and supplant himself for a third term… and perhaps for many more.
In order to overcome the opposition to his third term, he had to make one major concession: He committed to retaking Taiwan.
He also sent a very clear message by having former President Hu Jintao manhandled and removed in front of the entire Congress. It was visible not just to those in attendance, but to the entire world.
Former President Hu Jintao Is Escorted Away
Source: The Wall Street Journal
What stood out in Xi’s speech was a clear change in policy.
In the past, China’s policy for using force would only be allowed in the event that Taiwan sought independence. However, Xi’s new policy states that force will be used in the event that Taiwan resists a peaceful reunification.
These aren’t semantics. The Congress roared in applause when Xi stated that China will use all force necessary to affect the reunification of Taiwan.
It’s happening whether the world wants it to or not. I lived and worked in Asia and have been to mainland China and Taiwan more times than I can remember. Xi will not lose face, and he will not fail.
He also knows his timing is perfect. The West is distracted by the conflict with Russia, and the U.S. is weak on foreign policy. So Xi couldn’t have asked for a better time to make the move.
He likely feels more empowered, as the West has stood idly by and done nothing about the modern-day concentration camps and genocide taking place in the Xinjiang province against the Uyghur population.
China will take control of Taiwan. If I had to speculate, I would say it will happen in a matter of months – and no later than within the next two years. That’s why Taiwan Semiconductor is ramping up its efforts to move manufacturing offshore.
It’s not a coincidence that TSMC just announced its plans for a second semiconductor manufacturing plant in Arizona, which will produce the kind of advanced semiconductors that TSMC has historically limited to Taiwan-based production. More on that below.
These developments don’t mean that there will be a military conflict. China has the ability to assert administrative control over Taiwan much in the way that it did with Hong Kong.
How it happens is less important. That fact that it’s happening is what’s important. And developed countries around the world can’t move fast enough to establish new supply chains to prepare for this imminent outcome.
Last week, we explored how cars have evolved into a form of consumer electronic. Another major announcement further amplifies this clear trend.
French carmaker Renault Group announced that it’s partnering with Google to create a software-defined vehicle (SDV). That’s certainly new terminology.
With the SDV, Renault Group will manufacture the hardware – the car itself – just like it always has. But Google will provide an “intelligent” software system that will become the car’s operating system. We can think of it as an Android operating system for cars.
Back in 2019, I shared how Google’s strategic plan was to get inside our cars. Now it’s happening.
But the key here is that Google’s automotive operating system will work much like Tesla’s. Google will push out updates to the software over the air as needed. It’s the same process as when we download updates for our phones and computers.
Clearly, this is an effort to catch up with Tesla and beat Apple to the market. I’m amazed it’s taken this long.
After all, when legacy cars need a software update today, we typically have to take them into the dealership. And while we’re waiting, the dealership is likely to pitch us additional services to increase its revenue.
But Tesla’s success and ease of use is forcing the industry to adapt. Not doing so will ultimately result in even more loss of market share. Renault clearly understands that.
Regular readers know that I don’t like Google’s data collection practices. And as we would expect, its operating system will employ artificial intelligence (AI) to analyze all available data within the car.
The AI will learn the preferences of individual drivers. And it will attempt to improve comfort, convenience, and safety accordingly. This will be an attractive proposition to consumers who either don’t care about privacy or are unaware of Google’s practices.
Google’s AI will also predict maintenance problems in advance. It will detect when a particular part may need to be repaired or replaced – before something goes wrong.
And perhaps most interesting, the AI will build a safe-driving profile for each driver. That profile can be used to offer customized insurance quotes.
Safe drivers will get cheaper insurance. But break the rules, and you’ll be penalized with higher insurance rates. Drive safely and conservatively, and you’ll be rewarded with lower rates.
Either way, Google will be “watching.”
Soon, most car insurance quotes will be determined by AI-based software based on real-world driving data. The industry wants it, as it will increase profits for insurance companies – and drivers who are willing to “comply” will pay less for insurance.
Aside from Google’s ambitions in autonomous driving software, it wants to develop the automotive operating system for the industry. It knows it can’t capture Tesla and Apple, but the rest of the industry is fair game.
And many automotive manufacturers will find this attractive, as it will save them billions of dollars in software development expenses – a task that the automotive industry has historically been very poor at.
Most consumers want to have a user interface more akin to what they’re used to with smartphones and tablets. Tesla’s success has been the proof of a product market fit.
This shift won’t happen overnight.
As Google gets design wins and partnerships in the industry, production vehicles that incorporate its software won’t hit the road until a few years later. But I’m certain we’ll see a bunch of Android-powered cars on the road in the 2026 to 2027 timeframe.
As I shared earlier, TSMC – the largest contract semiconductor manufacturer in the world – just announced plans to build a second multibillion-dollar plant in Arizona.
As a standalone announcement, this would be exciting in itself. But as we know, there’s a lot more going on.
Importantly, this isn’t the first. TSMC announced plans earlier this year to build a $12 billion plant in Arizona, which is already under construction. The plant is planned to go online by 2024. And it will manufacture 5 nanometer (nm) semiconductors.
Today, 5 nm is bleeding-edge technology. The newest iPhone models all use these chips, which deliver higher performance and lower power consumption than earlier semiconductors.
But by 2024, 5 nm won’t be bleeding-edge technology anymore. TSMC will have evolved to the next generation. Historically, TSMC has always manufactured its most advanced semiconductors in Taiwan, nowhere else.
That’s what makes this latest announcement so interesting. TSMC revealed that its second plant in Arizona will focus on 3 nm chips. That will be at the bleeding-edge of semiconductor manufacturing technology. And TSMC will produce it in America.
This is a first.
This clearly signals that TSMC acknowledges the imminent threat of China’s control over Taiwan. TSMC doesn’t yet know what the control will look like, so it’s aggressively moving to diversify its footprint into the U.S. and other markets.
Despite the situation with China, this is a smart business move by TSMC. Many of TSMC’s largest customers are based in the U.S. Locating manufacturing in the U.S. not only protects TSMC’s business, but also puts production closer to the end market.
As major investments like these are made, other related services and electronic component manufacturing will reshore to support a more resilient supply chain as well.
This process is about to accelerate once China asserts control.
We’ve been tracking Dish Network’s shrewd entry into the fifth-generation (5G) wireless space this year. It’s been interesting to watch.
As a reminder, Dish – a satellite-based multichannel pay TV operator – has been buying a lot of wireless spectrum and working to build out a 5G network. And the company is making big investments to support this initiative.
The company just raised $2 billion through a massive bond issuance. And get this: Dish issued this bond with an 11.75% coupon payment. That’s a big jump from the rates we’ve seen in the corporate bond space over the last decade or so.
Dish will use this capital to develop the next phase of its 5G network. It’s already turned on about 10,000 cell sites in the U.S. And this should get Dish Network up to 35,000 sites by the end of next year. That’s enough to cover about 75% of the U.S. population.
This has the media excited right now. They’re saying Dish is rising up to become the fourth major 5G provider in the U.S.
Regular readers of The Bleeding Edge know better. As we’ve discussed, Dish has no intention of maintaining this network long term.
The only reason Dish is going this far is because it had to strike a deal with the Federal Communications Commission (FCC) to get access to the wireless spectrum.
Per the deal, Dish agreed to build out its network to cover a certain percentage of the population. Otherwise, it would have to return to the spectrum.
Dish is smartly spending the minimum amount of capital that it can to build out its network and meet the FCC’s requirements. It’s been successful in a prior effort to buy more time from the FCC.
The clever part is that, as time passes and more consumers upgrade from 4G to 5G devices, the 5G spectrum – and Dish’s limited-coverage 5G network – become more valuable.
To whatever extend it can, Dish will spend the least amount possible and slow roll the deployment. But the endgame is clear to me: A sale to one of the three major wireless providers at a multibillion-dollar profit.
I have to respect for Dish Network’s long game. It will take years and cost billions of dollars, but the profit in the end will be worth it. That’s why the company doesn’t mind paying 11.75% on its $2 billion in bonds.
This has been an underappreciated strategic move by the company as a way to offset its declining business in satellite-based pay TV.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
