Is TSM stock facing an existential threat?

Though commonly overlooked by companies like Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), the Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is arguably the most important semiconductor company in the world.

Specifically, Taiwanese foundries manufacture nearly 70% of the world’s chips, and TSMC alone holds more than half of the global market. Additionally, Nvidia and AMD use the company as their supplier.

As a result, TSM stock has been one of the major winners of the 2024 stock market and is up 88.55% year-to-date (YTD) to its press time price of $191.94.

October 14 PLA exercises raise concerns about TSMC’s future

Still, the precarity of TSMC’s position was brought into focus yet again in October 2024 when the Chinese People’s Liberation Army (PLA) executed its ‘Joint Sword-2024B’ military exercise – allegedly a war game simulating a blockade – in the waters and aerospace surrounding the island.

Not only are the military maneuvers large, with more than 100 ships involved, but they come at a particularly dangerous time of the year. 

Indeed, the conventional wisdom states that an invasion of Taiwan is possible between May and June and in October of each year due to the weather patterns in the straits.

Though the situation is, at press time, calm, and there has been no Taiwan Strati Crisis since the 1990s, the situation on October 14 is tense due to the presence of PLA airplanes and ships and counter sorties launched by the Republic of China Armed Forces – the Taiwanese military.

Why is China conducting military exercises near Taiwan?

The situation is also tense due to the recent comments made by the island’s president earlier in October in which he pledged to resist annexation. 

The People’s Republic of China claims Taiwan as one of its provinces, while the island itself maintains a generally ambiguous posture. 

In its early days, in the immediate aftermath of the Chinese Civil War, the Kuomintang (KMT)-led government intended to use the island as a base for the reconquest of the mainland, though the project – and the idea of reunification – has been losing popularity in Taiwan over the decades.

Simultaneously, the popularity of full independence from China has been growing, though some factions are also favorable toward joining the People’s Republic.

Still, though Taiwan and its allies have been anxious about a possible PLA invasion since 1949, no such event appears imminent. 

Not only does the People’s Republic claim it does not intend a military takeover, but it is likely that in all but the most cynical of scenarios, U.S. intelligence would have warned of an invasion buildup well in advance.

This lack of imminent fear is also reflected in TSMC’s most recent performance as the stock is, despite the tensions, up 13.97% in the last 30 days and 5.07% in the last 7. Such performance in recent weeks also ensured the semiconductor manufacturer has regained a valuation of $1 trillion.

TSM shares have been performing similarly in the Taipei market as well.

TSMC plans to build more factories in Europe

Still, the risks associated with an attempted Chinese takeover remain high. TSM is the single biggest supplier of microchips, and any conflict in or around the island would jeopardize its production and export capacity.

It is worth remembering that in 2024, these semiconductors are used across numerous industries and are, for example, present in vehicles in addition to the obvious electronics such as smartphones and computers. A modern car is estimated to contain anywhere between 1,000 and 3,000 semiconductors.

Given the company’s importance and precarious position, it comes as little surprise that TSMC has started expanding its production into Europe. 

Work on a new factory in Dresden, Germany, began earlier in 2024, and October 14 reports revealed the plans to expand the number of production sites on the continent significantly.

Still, it is noteworthy that this expansion stems less from the fear of a war with the People’s Republic of China and more from the skyrocketing demand for semiconductors in recent years due to the ongoing artificial intelligence (AI) boom.

This demand is also evident in the $5.4 trillion rise in the market capitalization of major AI companies between late 2022 and the summer of 2024, the call from OpenAI CEO Sam Altman to invest $7 trillion in technology-relevant infrastructure, and Blackrock’s (NYSE: BLK) and Microsoft’s (NASDAQ: MSFT) recent decision to invest up to $100 billion in such a project.