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Technological battlegrounds and geopolitical bargaining chips
It is an unimposing battleground, thinner than a sheet of paper. But as a critical part of the infrastructure that underpins artificial intelligence (AI), advanced semiconductor chips are on the frontline of geopolitical rivalries.
Semiconductor chips power the electrical devices essential to modern living, from computers and smartphones to wind turbines, electric vehicles (some of which contain over 3,000 chips), washing machines and medical equipment. Crucially, advanced graphic processing unit (GPU) chips are needed to process the data and computations behind AI.
The importance of such chips has not been lost on investors or politicians. In the last two years, the share price of Nvidia, a leading designer and supplier of GPUs, has risen by over 400%. At the same time, leading economies, including the US, China, Japan, India, and the European Union, have launched ambitious plans to boost their own semiconductor industries, including via heavy subsidies.
A fracturing world, with fierce rivalry between US- and China-led blocs, is reshaping how countries protect their national interests and move to secure strategic industries
Today, the race to control these technologies is intensifying. A fracturing world, with fierce rivalry between US- and China-led blocs, is reshaping how countries protect their national interests and move to secure strategic industries. It is also unleashing a new wave of capital spending, shifting opportunities for investors.
Chip wars
Tariffs imposed in 2018 by then-US President Donald Trump on Chinese imports, followed by restrictions on sales of US technology to Chinese firms from 2019 onwards, heralded the start of the semiconductor ‘chip wars.’
A tough stance on China and the desire for the US to remain the world’s leading technological superpower form rare bipartisan ground in America. Rather than rolling back Republican measures when he took office in 2021, Democratic President Joe Biden added to them, imposing a widescale ban on the sale of advanced semiconductors to Chinese companies. The Netherlands, home of some of the most advanced chip-manufacturing equipment, announced its own restrictions in 20231.
For its part, China has responded by tightening control of exports of two metals used in chip production and shifting domestic credit from real estate towards industrial sectors. In some industries, this has already borne fruit: in 2023 it overtook Germany and Japan to become the world’s leading car exporter2. In May 2024, China set up its largest-ever semiconductor state investment fund, worth almost USD 50 billion.
Controlling chip-making has now become a geopolitical priority, and the nexus of current production is Taiwan
Taiwanese fault-lines
Controlling chip-making has now become a geopolitical priority, and the nexus of current production is Taiwan. The island, self-governing and claimed by China, is home to around 65% of global semiconductor production, and 90% of the production of advanced chips3. Investors fear an escalation in tensions between mainland China and Taiwan that would drag in the US. Political rhetoric, such as Donald Trump’s comments in mid-July 2024 on Taiwanese sector dominance, can lead to sharp swings in semiconductor stocks4.
The island’s location on a geological fault-line is another concern. An earthquake in April 2024 caused USD 92 million in losses for the country’s biggest firm Taiwan Semiconductor Manufacturing Company (TSMC), according to the company’s own estimates.
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Ironically, while semiconductor chips underpinned decades of globalisation, the tide is now turning. Semiconductors are being pulled in opposing directions by global superpowers. Taiwan, too, wants to retain its lead in such a globally important industry, both for the 15% of GDP which it generates, and the incentive it gives other countries to look after Taiwanese interests.
How far and fast the semiconductor industry can be remodelled is a source of debate. In the US, the 2022 CHIPS Act offered subsidies for firms to locate advanced semiconductor production on US soil. Arizona has been touted as a ‘Silicon Desert’ and the home of new fabrication plants, or ‘fabs’, including for TSMC.
Thus far, such efforts have done little to shake Taiwan’s dominance in semiconductors. Advanced chip manufacturing facilities can cost billions and take years to build. Sourcing or training skilled employees is a challenge. And manufacturing is just one part of the production process. Chip packaging and testing, a lower margin but crucial service, is still largely based in Asia, where labour costs are lower.
The race for technological supremacy and the need to counter climate change, manage changing demographics and upgrade ageing infrastructure are also driving a boom in global capital spending
Semiconductors as a microcosm
Yet over time, a more fragmented semiconductor ‘value chain’ looks likely, leading to more inefficiencies in a business where scale and concentrated production have historically been a key advantage. A fragmented semiconductor industry is just one manifestation of a world splitting into rival US- and China-led blocs. The battle for control of strategic industries, and the rewiring of supply chains and global trade, will have far-reaching consequences for many sectors, from defence and technology to green energy and pharmaceuticals. We expect such trends to drive some duplication and inefficiencies that could have inflationary impacts.
The race for technological supremacy and the need to counter climate change, manage changing demographics and upgrade ageing infrastructure are also driving a boom in global capital spending. Governments have become more accepting of fiscal deficits to meet higher investment needs. A once-in-a-lifetime capital spending wave will be worth some USD 130 trillion between now and 2027, according to estimates from consultancy McKinsey5.
For now, such trends are supporting global growth and economic resilience. Yet higher spending and rising inefficiencies also feed into our expectation of slightly higher inflation than pre-pandemic levels in the decade ahead.
Higher inflation implies the need for higher interest rates, in turn shifting opportunity sets across asset classes. We have amended the underlying or strategic asset allocation framework of our investment portfolios to accommodate this new world of higher neutral interest rates and persistent geopolitical risks. A higher ‘risk-free’ rate and higher expected investment returns in the decade ahead argue for simpler portfolios that focus more on core regions and exposures. From a tactical investment perspective, periods of heightened geopolitical risk can support haven investments including the US dollar, Swiss franc, and German Bunds.
Meanwhile, after decades of digitalisation, AI – supported by GPU chips – is reaching a tipping point. As it becomes embedded across service industries, AI should drive improvements in business models, operational efficiencies, and strategic differentiation for leading firms. We believe such trends will be equivalent to industrial mechanisation over the past two centuries. If AI delivers on its promised dividends and unleashes a productivity boom, control of leading semiconductor technologies will indeed be a powerful advantage.
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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